House and Senate Democrats are working with the Biden administration to pass legislation to fund their infrastructure initiatives, including wide-ranging social programs, and tax legislation to pay for those programs, at least in part. The House Ways and Means Committee released their tax proposals on September 13 and they have wide-ranging effects on high income and high net worth individuals. I will not address the changes in income or capital gains rates, but focus on three potential changes that affect estates and trusts. Remember, this is just a proposal and a final act is a long way from the President’s desk.
- Step-up Basis.
Despite an earlier proposal from some Senate Democrats, the House plan does not change step-up in basis rules that allow the basis of an asset to be given its fair market value at a person’s date of death, so that their heirs get a “step-up” of fair market value.
- Reduction in the Estate Tax Exemption.
Currently, a person’s estate is exempt from estate taxes up to $11,700,000. This plan reduces that exemption for 2022 and future years to half of the current amount, inflation adjusted. If this proposal passes this year, expect the exemption amount in 2022 to be about $6,000,000 per person or $12,000,000 a couple. If your estate is substantially below this threshold, there is no need to consider any other type of planning. If your estate was well above the old threshold, then you probably have already done estate tax planning. If your estate is between the two, you might need to consider estate tax planning. See, however, the problem of being in what I call the “donut hole” (reference to prior article)
- Changes to IRAs and Tax-Deferred Accounts.
There are various proposed provisions to limit Roth conversions, require greater taxable distributions from IRAs and otherwise limiting the use of large tax deferred accounts by high income and/or high wealth individuals. High income has generally been defined as income of $400,000 or more per year. The proposals in this area are complex and not easily summarized but take a case-by-case analysis.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, specific tax, legal or accounting advice. We can only give specific advice upon consulting directly with you and reviewing your exact situation.
