Trust & Estate Planning 2021 (With An Eye To Biden’s Administration)

We have consistently communicated the importance of estate planning. This is “income tax season,” so here’s a different spin on why you should be planning.

Under the current administration, we believe tax laws will change. It’s just a matter of when and what the effective dates will be. Any legislation could provide a very narrow window to implement planning. Therefore, there is no time like the present to complete your trust and estate planning, before it’s too late and/or to avoid the rush when everyone else calls their accountant.

Top 3 Income Tax Reasons You Should Rethink Your Estate Planning in 2021

  1. Possible elimination of the step-up in basis to fair market value rule impacting capital gain taxation
  2. Possible increase in the top income and capital gain (and qualified dividend) rate to 39.6%+
  3. Possible decrease in the itemized deduction benefit to a maximum of 28%

Gain Smoothing Strategies

You have undoubtedly heard about a potential lowering of the lifetime exemption amount, but you should also plan for a loss in step-up (or a gain recognition event at death). This means you will need to rethink your strategies about whether to recognize gain (i.e., deferring till death) and perhaps engage in tactics to smooth gain out now over longer periods of time.

However, caution is required to incorporate the time value of money in paying any tax earlier than later and understanding how mortality assumptions come into play in the tax-savings calculation. Moreover, because there are a variety of gain-smoothing strategies, consulting with your accountant will help you find the best fit for your circumstances.

Tax Bracket Management

You should plan around whether the trusts you are setting up are taxed to the grantor, or accumulate income and pay tax, or distribute income for taxation at the beneficiary level because the effective income tax brackets for each could be vastly different. This will require balancing income tax planning with estate tax planning. However, strategies for reducing estate taxes focus on removing assets from one’s estate while income tax planning focuses on keeping assets.

Further, increasing a beneficiary’s taxable income can have negative effects not routinely contemplated such as accelerating the phase-out of the AMT (alternative minimum tax) exemption or prematurely crossing the NIIT (net investment income tax – aka the Medicare Surtax) threshold. Trust language should be reviewed for appropriate flexibility and revocable trusts may need amending. Annual distribution planning should be completed within 65 days of the end of the year.

Deduction Planning

You should plan for maximizing deduction benefits. There are certain qualifying administrative expenses trusts might deduct but for which individuals cannot. Should the itemized deduction benefit be limited to 28%, it may be prudent to accelerate deductible expenses. Charitable deductions set aside by trusts but paid the following year can be deducted in the current year.

State Taxes

When evaluating the cost/benefits of your planning strategies, consider the state tax consequences. This is the time to consider where a trust is domiciled compared to the state tax ramifications for the beneficiaries.

There may be ways to avoid state taxation all together. Certain types of trusts can be especially beneficial in large sale transactions such as when selling a business.

How SVA Can Help

SVA can help you sort through these issues and develop a plan that meets your goals and objectives while being estate and income tax-friendly. SVA will also collaborate with your estate attorney to ensure documents are drafted in accordance with your wishes and assist in implementation.

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Biz Tip Topic Expert: Richard Kollauf - JD, CPA, CFP, AEP

Richard is a Principal for SVA Certified Public Accountants and has more than 35 years of experience working in financial, accounting, and legal operations. Richard’s expertise in the multi-faceted financial environment includes business succession planning, tax, investments, finance, mergers and acquisitions, estate planning, and trust administration. He also has experience in estate planning and distribution for complex operational and investment multi-state businesses. Richard provides income tax consulting services to closely-held and family-owned businesses, as well as high net worth individuals.

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