Proactive Moves for the Wealthy to Consider Ahead of Possible Tax Law Changes

The tax landscape could be changing considerably in the near future, and these changes could affect high-net-worth families and their heirs. But there are a few steps they can take to minimize the potential impact.

A wealthy man works on his sportscar.
(Image credit: Getty Images)

Recently proposed tax law changes will, if enacted, significantly alter the tax and estate planning landscape for high-net-worth individuals. While the final form these proposals take is far from certain, persons of wealth should consider taking steps this year to mitigate the risk of potentially unfavorable tax law changes.

Background and Current Law

Under current law, the federal gift and estate tax exemption amount is the highest it has ever been. Individuals can currently give during life or at death up to $11.7 million in assets without triggering gift or estate tax. Couples can give up to $23.4 million tax free.

The current large exemption amount is scheduled to revert to pre-2018 levels beginning in 2026. When that happens, the exemption will decrease to approximately $6 million. Gifts in excess of that amount will attract gift or estate tax, calculated at roughly 40% of the value of transferred assets.

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Currently neither lifetime gifts nor bequests trigger income taxes for those who receive them. Recipients of lifetime gifts take a “carryover” basis in gifted property, preserving any unrealized gain. Assets that pass at death receive a basis “step-up” to fair market value, effectively wiping out any unrealized gains in assets owned at the time of death.

Proposed Tax Law Changes

In late May, the U.S. Treasury Department released General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals (aka the “Green Book”), setting forth a description of the administration’s revenue proposals. The Green Book contains several proposals that could dramatically impact tax liabilities for high-net-worth taxpayers.

The administration proposes to increase the top income tax rate for individuals (and presumably trusts) from 37% to 39.6% (the rate in effect prior to 2018). For 2022 this higher rate would apply to taxable income over $509,300 for joint filers and $452,700 for single filers. After 2022 the brackets will reset based on inflation. This change is proposed to begin in 2022.

The administration has also proposed taxing long-term capital gains and qualified dividends at ordinary income rates for taxpayers with adjusted gross income over $1 million. This change would result in a federal tax rate as high as 43.4% (proposed 39.6% + 3.8% Net Investment Income Tax). The higher tax rate on long-term capital gains and qualified dividends would apply only to the extent the taxpayer’s AGI exceeds $1 million. This change is proposed to be effective in April 2021 (i.e., retroactively from the future date of enactment).

Finally, the administration plans to treat gifts and transfers at death as income realization events. Gifts and bequests would be treated essentially as if the donor (1) sold the property, realizing any gain or loss; (2) repurchased the property; and (3) gifted identical replacement property, meaning any previously unrealized gain would be recognized by the donor and income taxes paid on the “phantom” gain. Most transfers of appreciated property to and distributions from trusts (including most grantor trusts) would also trigger gain recognition.

As currently proposed, transfers of appreciated property to charity would not generate a taxable capital gain. Additionally, each person could exclude $1 million of the phantom gain from recognition (a lifetime exclusion for gifts or transfers at death). Transfers to a surviving spouse at death would not trigger immediate gain recognition, but the surviving spouse would take a carryover basis in the transferred assets – meaning the tax liability would be triggered at the surviving spouse’s death or sooner if gifted during life. This change is proposed to begin in 2022.

The Green Book did not propose changes to current gift and estate tax laws. Under the income realization proposal, the donor may be subjected to both income and transfer taxes on a single transfer. Further, long-term capital gains triggered by gifting may be taxed at higher ordinary income tax rates.

Planning Considerations for 2021 and Beyond

It’s important to remember the Green Book proposals are just that – proposals. The legislative process will no doubt significantly change the details in any final bill. The forces of compromise and political expediency may reduce the harshness of these proposals (including whether any of the proposals have retroactive effect). However, wealthy taxpayers may want to take some steps to protect themselves proactively:

  • With the prospect of higher income tax rates looming, high-income individuals (and potentially trusts) may want to pull some income into 2021. For example, individuals who are considering converting a traditional IRA to a Roth IRA may want to take that step prior to the end of 2021, when the highest income tax bracket may be lower.
  • Keeping future year AGI below $1 million may also serve to avoid higher rates on long-term capital gains and qualified dividends. Correspondingly, deferral of deductions (e.g., charitable contributions) into 2022 or later may make the deduction more valuable, given the proposed changes.
  • Taking advantage of the current lower income tax rates on long-term capital gains by triggering gain recognition in 2021 may be advisable for some, especially if selling makes sense for non-tax reasons (e.g., diversification). There are no rules prohibiting wash gain transactions and appreciated securities can be immediately repurchased without penalty. Given the uncertainty of the form final tax laws will take, accelerating large gains may be risky; taking a wait and see approach may be best.

As far as estate planning goes, a couple of other possibilities for taking action come to mind:

  • While the concern of a near-term lower gift and estate tax exemption has been removed, beginning in 2022 large gifts may trigger significant income tax on phantom gains (which may be taxed at a higher rate). If future transfers at death trigger income recognition, making gifts in 2021 may make sense – both to avoid gain recognition on future gifts and to utilize the historically large gift tax exemption. For individuals or couples whose financial independence (and personal risk tolerance) permits use of their remaining gift tax exemption, 2021 gifts continue to be advantageous.
  • Moving higher-basis assets into one’s taxable estate may reduce the impact of the proposed gain recognition rule on transfers at death. Traditional planning often involves retitling assets with low tax basis in an individual’s personal name or revocable trust. This is designed to ensure inclusion of low-basis assets in the person’s taxable estate to achieve a basis step-up at death. Under the proposed changes, owning low-basis assets at death may result in significant income tax; dying owning higher-basis assets may mitigate this risk.

The Bottom Line

Individuals considering making changes to their estate plans should seek detailed advice from an experienced tax professional. Depending on individual circumstances, some moves may backfire if final laws differ from proposed changes. Hopefully, the details of future tax law changes will become clearer in the coming weeks, making planning outcomes more certain.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Douglas Andre, JD, CPA
Family Office Counsel, Keel Point

Douglas Andre serves as the Family Office Counsel for the Horizon Family Office Team. Before joining Keel Point, he was a partner with Ivins, Phillips and Barker in Washington, D.C., focusing on domestic and international income tax and estate planning. Doug began his career as a Naval officer and carrier-based pilot. He began his legal career after leaving the Navy, helping clients manage their tax and estate compliance and planning. In addition to being an attorney, he is a licensed CPA.