How Will You Protect Your Kids from the Proposed Inherited Wealth Changes?


Have you heard that the Biden administration has proposed several major changes to the federal estate tax? These include raising the capital gains tax rate for the highest earners to match ordinary income tax rates and removing the step-up basis provision that previously allowed heirs who inherited assets to avoid capital gains tax on any asset appreciation during the time their inherited asset was held by the original owner. If you are concerned about protecting your kids from these proposed changes, read on to learn more about three moves you can make.

1. Understand Different Tax Rates. It can be important to recognize that different tax rates will continue to apply at different levels of income, and on different estate sizes at the end. Speak with your tax advisor and your estate planning attorney to figure out what your tax rates will be on different assets. If you may face higher capital gains tax rates in the future, now may be a good time to sell or transfer appreciated assets if you are certain it is the right move. Conversely, if you expect to be able to take advantage of a lower tax rate due to a different rule, you may want to configure the asset to fit that rule.

2. Create an Irrevocable Trust. An irrevocable trust can be a great way to remove assets from your taxable estate. You may want to look into creating a Spousal Lifetime Access Trust (SLAT) if you are married.  A SLAT allows you to remove assets from your estate but still allow your spouse access to be able to fund his or her lifestyle after you pass away until his or her own time comes. You can also look into different types of trusts that likewise remove money from your taxable estate.

3. Make Gifts Now. The Biden administration has not yet proposed changes to the current gift tax exclusion, which allows individuals to gift up to $15,000 and married couples to gift up to $30,000 to any recipient in a given year. If you have two children and five grandchildren and you are married, you and your spouse can collectively gift up to $210,000 annually tax-free to the seven recipients, which allows you to remove over $1 million from your taxable estate in a five-year period.

With big proposed changes on the horizon, now may be the best time to give our office a call to schedule a meeting where we can discuss how to address these potential changes in your estate plan.

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