5 Estate Planning Moves to Make ASAP

One of President Biden’s campaign promises was to introduce tax reforms that roll back various Trump era policies while increasing tax rates for some of the wealthiest Americans. He will expand federal income tax for those earning $400,000 or more, plus increase capital gains and payroll taxes, in addition to expanding estate tax. If you are in the process of planning your estate or transferring wealth, chances are Biden’s policies could have an impact on your strategies. 

What to know about Biden’s tax plan

Biden’s tax plan integrates into his economic stimulus plan, which is predicted to raise revenue by $3.3 trillion in the next 10 years, not adjusting for macroeconomic feedback. Among the notable tax changes Biden will introduce, the individual income tax rate for those earning more than $400,000 will increase to 39.6%, up from its current 37%. For estate planning, Biden’s plan also has a number of ramifications. Notably, the estate tax exemption is expected to be halved, and the “step-up in basis” rule repealed. These actions could significantly impact the intergenerational transfer of wealth. 

Top estate planning moves to make right now

What should you do right now to respond to Biden’s tax plan? Here are five estate planning actions to take.

1. Take advantage of the estate tax exemption

Biden is expected to not only reduce the estate tax exemption but also increase the top rate of the estate tax. His plan calls for reducing the estate tax exemption to $3.5 million, where it was in 2009. He will also increase the top rate of the estate tax to 45 percent. 

Action steps to take: If you’re already engaged in strategic estate planning strategies to avoid a majority of estate tax, this might not have a major impact on your finances. However, if you haven’t started to work on estate planning, now is the time to create a framework so you can decide if you want to take advantage of the increased estate tax exemption while it lasts. The current estate tax expires in 2025, although Biden could tackle tax reform sooner than that. Could you use tax software to help you strategize? While some people do take a do-it-yourself approach to their estate planning, chances are you’ll have complex questions which could make hiring a tax professional worth it. 

2. Maximize low interest rates

With the federal interest rate at a near-historic low, now is the time to take advantage of wealth transfer strategies where interest rate plays an important role in determining a gift’s value. These could be anything from a grantor retained annuity trust (GRAT), to a charitable lead trust, or even loan-based techniques such as intra-family loans or self-canceling installment notes. These strategies typically work better when rates are low, so if you’ve been considering them for some time, now is the time to act. 

Action steps to take: Work with your advisor to determine the best way to take advantage of current interest rates based on your family’s circumstances and what you’re trying to do with your money. If you have estate tax exposure, finding ways to minimize that in the current interest environment can help lessen the impact of Biden’s proposed changes. Keep in mind that setting up a trust doesn’t happen instantly and it can take an attorney some time to draft the appropriate documentation. Many estate planning attorneys are experiencing high volumes of work due to the current market, so it’s best to start planning early. You can always wait to file the paperwork until you’re totally comfortable, but having it prepared and knowing the trusts you want to establish can help you make moves quickly should any market circumstances change. 

3. Communicate to heirs

In the rush to create your estate plan before Biden makes good on some of his campaign promises, don’t neglect to take the time to openly discuss your intentions with your heirs and beneficiaries. Though it might seem awkward or an unnecessary step when you’re busy making so many complex financial decisions, this is a best practice in estate planning. The clarity it creates can help avoid estate disputes in the future. 

Action steps to take: Schedule time with your heirs to have a formal meeting where you can review your estate plan and upcoming financial moves you plan to make that concern your heirs. Include any lawyers or estate planners in the discussion so they can thoroughly explain your decisions and the market factors that are influencing them. 

4. Adjust for changes to step-up in basis

The step-up in basis currently provides major tax benefits to many of those who inherit assets after the death of a loved one. When assets like a property or stocks are inherited, typically they are subject to capital gains tax as they have often appreciated since the time they were purchased. The step-up in basis moves the starting point for measuring capital gains to current market rates, effectively resetting it. Biden’s tax plan calls for eliminating the step-up in basis. If he follows through on this plan, heirs would then receive the carryover basis. 

Action steps to take: Biden hasn’t yet provided details on how he would eliminate the step-up in basis or when. If you want to take a “wait and see” approach to this policy-point, it’s still wise to develop a plan now so you can take action immediately should the change to the step-up in basis rule impact your finances. That means making preparations by talking to your estate planning team, creating a strategy for transfer of wealth, and even drafting the appropriate documents. 

5. Find an advisor you trust

Biden’s proposed tax changes can have complicated ramifications that can be hard to decipher on your own. If you don’t already have a financial advisor, professional tax preparer, or wealth management team, getting one in place could help you save money and headaches when it comes to planning your estate. Not only can these professionals help you find strategies you might have missed, they can also assist in the case of an audit, help you avoid mistakes, and help you develop a strong communications plan for sharing your wealth management strategy with your heirs. 

Action steps to take: Interview wealth management professionals comparing their rates and experience with your specific circumstances. Be sure to ask how you’ll be charged, if there is a cost to consultations, and if your estate planner has anyone in house to draft the legal paperwork or if attorney fees are separate. 

Final word

While Biden’s proposed tax reforms could have major implications when it comes to estate planning, it’s not entirely certain how soon he’ll enact his changes or how sweeping they will ultimately be. If you prefer to “wait and see” what will happen, it’s still smart to get a plan in place, with the necessary documentation, so you can quickly make changes if necessary. Remember that estate planning requires you to make many complex decisions that often take time to work through, especially if you include your heirs in the conversation. Start now if you haven’t already, and get a plan in place that allows you to maximize your wealth in any tax environment.