CLIENT ALERT

Important Tax Update

FROM CANERICK & CANERICK

Friends,

At Tomoro we analyze the strengths and pitfalls of specific choices our clients have made when building wealth, while factoring in change to tax laws which are outside of our control. The current gift and estate tax laws are in our favor and provide an opportunity to capture lifetime unified credits. 

The new administration recently proposed tax bills which would significantly reduce this potential. Developing a tax reduction strategy specific to our clients’ needs should start sooner rather than later. The strategies available are not only reserved for clients whose current net worth exceeds the anticipated limits (outlined in the article below), but also for those who project to exceed these limits based on savings rate, potential inheritance, wealth accumulation and protection planning efforts. 

 It is our perspective that tax reduction strategies should include, but not be limited to, "high net worth” individuals.  The following article written by Michael Canarick, Partner at Tomoro and Director of Estate Planning, provides an in depth look at the proposed changes to gift & estate tax laws and the negative impact these laws present.

As an insight to the daily activity at Tomoro, below are a few "hot topics" for 2021:

  • IRA to Roth IRA conversions;
  • Brokerage portfolio tax transition analysis;
  • Capital gain deferment strategies;
  • Utilization of Life Insurance (for those economically insurable) to support wealth accumulation, preservation, and distribution of assets; and
  • Developing advanced estate plans utilizing a variety of techniques. 

Thank you for being in relationship with us. We encourage you to share this information amongst your friends, family and colleagues.

Jeremy

START OF ARTICLE

Over the past few weeks, two tax bills were introduced. The first bill, written by Senators Bernie Sanders and Sheldon Whitehouse, would make substantial changes to the extremely favorable gift and estate tax laws that we have enjoyed over the past several years. The second bill, which was authored by Senator Elizabeth Warren and others, introduced a proposal to significantly alter the “step up in basis” rules at death.

Shortly before the 2020 elections, in anticipation of the Democrats potentially controlling the Presidency and both houses of Congress, I wrote an article discussing certain estate tax reduction strategies that could still be taken advantage of prior to any law changes. Within the article, I expressed concern any changes to the law made in 2021 could be retroactive to the beginning of the year. If changes were retroactive, any planning to take advantage of the current law would have had to have been completed in 2020. The good news is the proposed changes set forth in the Sanders/Whitehouse bill will not be retroactive to the beginning of the year. Instead the bill calls for certain changes to become effective upon enactment and certain changes to become effective on January 1, 2022. The bad news is that the proposed changes are very unfriendly to taxpayers. Here are a few of the highlights from that bill:

  • The estate tax exemption would be reduced from the current $11,700,000 to $3,500,000.
  • The gift tax exemption amount would be reduced from the current $11,700,000 to $1,000,000.
  • The estate tax rate would be increased from its current rate of 40%. The rate would be 45% on estates from $3,500,000 to $10,000,000; 50% on estates from $10,000,000 to $50,000,000; 55% on estates between $50,000,000 and $1,000,000,000; and 65% on estates in excess of $1,000,000,000.
  • The annual gifting exclusion would be decreased from $15,000 per donee to $10,000 per donee. In addition, and perhaps more importantly, the total amount of annual exclusion gifts that can be made by a donor in any year would be capped at $20,000 (the current law contains no cap). In other words, an individual that was making $15,000 gifts to five beneficiaries each year (for a total of $75,000 of annual exclusion gifts) will now only be able to make $4,000 gifts to each of those five beneficiaries (for a total of $20,000 of annual exclusion gifts).
  • Grantor trusts for federal income tax purposes (funded or transacted after enactment of the changes) will be subject to the estate tax at the grantor’s death. The use of grantor trusts is one of the primary tools used by estate planners. This change would all but eliminate this most popular tool for estate tax planning.
  • Grantor retained annuity trusts (GRATs) would have to have a minimum 10-year term and a minimum gift value on funding of at least $500,000 or 25% of the fair market value of contributed assets. These changes would make GRATs significantly less attractive.
  • Discounts for interests in family non-business entities would be eliminated.
  • Unlike the Sanders/Whitehouse bill, the Warren bill would be retroactive to January 1, 2021. This proposal provides for taxation on unrealized appreciation at death in excess of $1,000,000. This is a significant departure from the long standing "step-up in basis" rule and could result in taxation at death even on estates that are below the estate tax exemption threshold.

It is important to note that these are just proposals at this time. We do not know whether any portion of these bills will ultimately be enacted into law. Having said that, the aggressive changes being sought after are certainly an indication that some level of transfer tax reform is likely to be heading our way before year end. Please reach out to me if you are concerned about what these changes might mean for you and your family. There is still time to take advantage of the current laws while they are in force.

We look forward to speaking to you.

Michael Canarick, JD, LLM

Tomoro Partner

2021-120013 Exp 04/22. This material is intended for general public use and is for educational purposes only.  By providing this content, Park Avenue Securities LLC is not undertaking to provide any recommendations or investment advice regarding any specific account type, service, investment strategy or product to any specific individual or situation, or to otherwise act in any fiduciary or other capacity.  Please contact a financial professional for guidance and information that is specific to your individual situation.  Russell 2000 Index measures the performance of the smallest 2,000 companies in the Russell 3000 Index of the 3,000 largest U.S. companies in terms of market capitalization. Dow Jones Industrial Average is a widely used indicator of the overall condition of the stock market, a price-weighted average of 30 actively traded blue chip stocks, primarily industrials, but also includes financial, leisure and other service-oriented firms.  Indices are unmanaged, and one cannot invest directly in an index. Past performance is not a guarantee of future results. All investments contain risk and may lose value. Investing in the bond market is subject to certain risks including market, interest rate, issuer, credit and inflation risk. Equities may decline in value due to both real and perceived general market, economic and industry conditions. 2021-119110  Exp 4/22. Source Bloomberg

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Jeremy Suarez

Jeremy has been in the financial advisory business since 2005 after graduating from Fordham University’s School of Business. He joined Tomoro as a managing partner in 2014. During his tenure, Jeremy has consistently excelled as an advisor in both the personal household and business planning arena. As a managing partner, Jeremy also serves as a mentor to all associates and is hands-on in supporting Tomoro’s growth planning. He has completed various curriculums and certifications, such as New York University’s graduate studies in financial planning, is a Certified Exit Planning professional, and Investment Advisor Representative. He and his family reside in Colts Neck, NJ.

Registered Representative and Financial Advisor of Park Avenue Securities and Financial Representative of Guardian, AR insurance license #8401385 CA insurance license #0F94382

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Indices are unmanaged, and one cannot invest directly in an index. Past performance is not a guarantee of future results. All investments contain risk and may lose value. Investing in the bond market is subject to certain risks including market, interest rate, issuer, credit, and inflation risk. Equities may decline in value due to both real and perceived general market, economic, and industry conditions.

Statistics sources from Central Bank Rates and Bloomberg.

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