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Concerned about potential tax changes? Here are 3 estate planning strategies

May 26, 2021

This article was co-written by Kenneth Ericson, CFP®, CTFA Wipfli Financial Advisors, LLC

With the proposed American Families Plan has come growing concern over potential tax changes.

The plan proposes a range of changes, including raising the top tax rate back to 39.6%, raising capital gains tax rates to reflect ordinary income tax rates, and ending the practice of “stepping up” basis for property at death for gains in excess of $1 million.

President Biden also campaigned on reducing the estate tax exemption from $11.7 million per person to $3.5 million. While this reduction isn’t included in the American Families Plan, it potentially will at least be on the table for future legislation.

For those seeking to transfer wealth out of their estate, now may be the ideal time to get started on your plan.

Read more: American Families Plan proposes major changes, including tax reform

Estate planning takes time

Back in 2012, the estate tax exemption was set to revert from $5.12 million to $1 million at the end of the year without legislative action by Congress. By December, Congress still hadn’t acted — causing families with higher net worths to panic. This resulted in hasty and irreversible decisions employed to transfer wealth out of their estate, often relinquishing control of valuable assets and rights.

Additional time to strategize could have been beneficial to allow these folks to establish the optimal estate plan for their particular needs.

It’s difficult to plan for and execute estate planning decisions in just one month. Estate planning is a complex process that potentially requires you to involve your CPA, financial advisor, attorneys and other advisory team members. You need to identify your options and develop plans, as well as account for the complexity of your business and the appropriate strategies — all of which takes time to account for the unique circumstances.

With seven more months remaining in 2021, now is the time to start having conversations with your personal advisory team around potential tax changes and prepare yourself to make the most informed decisions around your options — decisions based on facts, not fear.

With that in mind, here are three estate planning strategies to consider:

1. Consider gifting parts of ownership in your business to the next generation

If your business was negatively impacted by the COVID-19 pandemic, now is potentially an ideal time to get the business valued. 

The pandemic depressed the values of many businesses. As we come out of the pandemic and the economy continues its recovery, values are likely to rise again. If you get your business valued now and gift ownership interests based on that lower value, you can 1) use less of your lifetime estate tax exemption than you would have when gifting with a higher business value, 2) help keep future company growth out of your estate and 3) get more wealth out of your estate before any potential tax changes tax effect.

Don’t forget about the discounts for lack of control and lack of marketability. Non-controlling (minority) interests in privately held companies are typically considered to be worth less than the pro-rata share of the total value of the firm. Therefore, discounts for lack of control and marketability can be applied, and shares are gifted at the discounted values. These discounts enable you to transfer more stock to the next generations, as it is often sensible to transfer a minority interest in a company than to transfer undiscounted cash.

Learn more: 4 reasons why right now is the best time to gift your business

2. Consider setting up a trust

GRATs, CLATs and SLATs and three estate planning vehicles that may be popular this year when it comes to transferring wealth. Here’s what they are and how they work:

Grantor retained annuity trust (GRAT): In a GRAT, the grantor funds the GRAT with assets that appreciate over time (e.g., stocks or business interest) in exchange for a guaranteed annuity for a fixed number of years (minimum of two years). When the term expires, the GRAT balance that remains is transferred tax free to the designated beneficiaries. Note that the grantor must outlive the GRAT term for the balance to transfer tax free.

Charitable lead annuity trust (CLAT): A CLAT works very similarly to a GRAT, but instead of the grantor getting annual annuity payments, a designated charity, foundation or donor advised fund receives them. Once the CLAT term expires, the remaining assets within the CLAT are transferred tax free to the designated beneficiaries, aka the grantor’s descendants.

Spousal lifetime access trust (SLAT): In a SLAT, one spouse gifts assets into a trust (using their estate tax exemption to do so) to the benefit of the other spouse. This removes the assets from their combined estates while allowing them to keep control over the assets. Furthermore, any asset appreciation takes place in the trust.

Read more: What is a GRAT, and why is now a great time to set one up?

3. Leverage the annual exclusion gift every single year

From an estate planning standpoint, using the annual exclusion gift is considered very easy, low-hanging fruit that you should absolutely be taking advantage of every year.

Under the law, an individual is allowed to give $15,000 per year, per recipient, tax free. That means you and your spouse can give $30,000 to each child, grandchild, etc. While this may not seem significant at first, making this gift every year can chip away at your estate and gradually transfer more wealth out of your estate on a consistent basis.

Wipfli can help you jumpstart your estate planning

Good estate planning accounts for any outcome. No matter which tax changes go into effect and which do not take place, you’ll have taken prudent steps to review your current plan along with what has changed or might change in the future and what actions you can take to establish the optimal estate plan for your needs.

Wipfli and our affiliate, Wipfli Financial Advisors, can help. From valuing and gifting your business, to strategizing around trusts, to tax planning, we provide an integrated team that helps ensure you’re developing a solid, comprehensive plan. Click here to learn more.

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Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services, fees and conflicts of interest is set forth in Wipfli Financial’s current Form ADV Part 2A brochure and Form CRS, copies of which are available from Wipfli Financial upon request at no cost or at www.adviserinfo.sec.gov. Wipfli Financial does not provide tax, accounting or legal services.

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Author(s)

Francis P. Egan, CFA, ASA
Senior Manager, Valuation Litigation and Transaction Services
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