2022: The Tax Tornado Is Coming

From a financial/estate planner’s and estate attorneys’ point of view, Happy New Year and glad 2021 is behind us. While 2021 was a great year for consulting revenue, it left everybody paralyzed by the wealth destroying proposed legislation from the Biden Administration. One is tempted to think the proposed legislation by progressive legislators is due to lack of comprehensive understanding of how wealth has been passed down for generations.  To the contrary, certain progressive legislators, such as Elizabeth Warren and Bernie Sanders, have a thorough understanding of how wealth is transferred in this country, and they are leading the attack against the long-allowed strategies in an insidious attempt at wealth redistribution.

Grantor trusts and other planning arrangements have historically allowed business owners to have some chance of passing down their successful businesses from generation to generation. If these proposals were to go through, they would pierce the heart of succession planning trusts and strategies used for the past 60 years and dismantle them.

Throughout last year we worked at drafting trusts with a keen eye on flexibility to accomplish pre-determined goals while adhering to well established estate planning guidelines. The details of SLATs, Grantor Trust, ILITs and other types of trusts with such acronyms, whether existing or being drafted, had to be rethought to consider the major changes proposed.

Fortunately, the bill did not pass. The last version of the Build Back Better plan eliminated all the attacks on Grantor Trusts etc. Because Elizabeth Warren and Bernie Sanders understand common and sophisticated estate and financial planning techniques and seem determined on eliminating these planning tools, we expect they will be back again in some fashion to challenge legacy planning. Wealthy individuals, business owners and planners need be concerned that what traditionally worked and has been known as safe strategies may be eliminated. Grandfathering of transactions are the best defense against future changes in tax and family planning, but there are no assurances grandfathering will occur given the demeanor of the current administration.

Following, are the history of estate tax exclusions (the amount not subject to estate taxes) since its inception and the maximum tax rate applied to the taxable estate. The current individual exclusion amount ($12,060,000) is under a sunset provision automatically and drops back January 1, 2026, to prior amounts ($5,000,000. Plus, inflation adjustments).

See following historic amounts of exclusion and estate tax rates.

On the income tax side of planning, there also big changes were proposed. Individuals with large savings in tax deferral accounts would see additional future income taxes. Even Roth IRAs would influence the taxation of the traditional IRAs. Complicated? Yes. Larger IRAs would have had distributions forced out causing large income tax liabilities at targeted years in the future even if one is below age 72. The trigger will be the size of the IRA, not age.

A watchful eye on future proposals and an understanding of alternative strategies may require decisive action soon. The current government debt and a view of taxation history might be cause for rethinking the importance of tax planning.

The highest federal tax rate from 1913 to today varied quite a bit. The amount of income subject to these changes varied also. The rate of 70% applied to incomes over $200,000 from 1965 to 1967, in today’s dollars that income would be approximately $1,400,000. Consider what a 70% income tax bracket would do to some investment returns and earned income.

Often tax planning is a tough thing to do with an emphasis on coordinated financial planning. Most professional services focus primarily on the current situation and fall short on planning. One typically turns to the traditional professions:  bankers; lawyers; CPAs; and investment orientated Wealth Managers/Insurance agents because all add a specific component, but usually not in a coordinated fashion among the various advisors. The lack of coordination among the different professions may be due to the lack of compensation when crossing lines of expertise. However, we at Exemplar stress the team approach. That is, when a client hires us, the client gets the full team and whatever financial and legal expertise is required to get the job done correctly and in a coordinated manner.

If you have substantial wealth tied up in real estate, business, or other assets including cryptocurrency, it is important to know the professionals team you will need. Good financial planners and estate planning attorneys had no time for taking on new clients last year. So, start a discussion or
relationship now. https://exemplarcompanies.com/financial-services/


Stephen White

Stephen White

Managing Director, Insurance and Financial Services

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