President Joe Biden wants to raise taxes on inheritances to
help fund his lofty infrastructure plans.
The proposals call for taxing capital gains on inherited
property at death, treating the transfer like a sale. Heirs may exclude the
first $1 million of gains ($2.5 million for married couples).
This new tax hike is separate from estate taxes on transfers
of more than $11.7 million, unchanged since former President Donald Trump’s
2017 tax overhaul.
The administration is also calling to hike the top capital
gains tax rate to 39.6%. The highest earners may pay as much as 43.4% on
long-term capital gains, including the 3.8% tax for Obamacare.
“It’s flipping estate plans upside down,” said Dan Herron, a
San Luis Obispo, California-based certified financial planner and certified
public accountant with Elemental Wealth Advisors.
Currently, heirs defer taxes on inherited property until
they sell it. They also receive a so-called step up in basis, adjusting the
property’s purchase price to the value on the date of death.
But if Biden’s plans go through, heirs may soon face hefty
tax bills at death.
If their inherited property growth exceeds $1 million, they
may owe as much as 43.4% long-term capital gains taxes, not including state or
“It’s probably the No. 1 risk our clients are facing right
now,” said Rob Hazard, an estate planning attorney and certified public
accountant at Gullett Sanford Robinson & Martin in Nashville, Tennessee.
Estate planning with life insurance
As Congress wrestles over Biden’s agenda, some advisors have
been proactive with clients, exploring ways to lessen the possible impact. If
taxes rise, some clients may buy more life insurance to cover the bills, said
Clients with more than $11.7 million, the estate tax
exemption for 2021, may buy a so-called irrevocable life insurance trust, using
the policy to pay taxes at death. But those with fewer assets may have life
insurance without a trust, he said.
The biggest perk of using life insurance for estate planning
may be peace of mind, Herron said.
Clients often feel a sense of relief knowing their heirs
will receive tax-free proceeds to cover necessary expenses — such as levies,
funeral costs, administrative fees or unpaid debt — when they are no longer
“I think insurance is going to continue to be a tool used by
our wealthy clients,” Hazard said.
While it may be too soon for sweeping estate plan changes,
those impacted may want to get property appraisals to gauge their taxable
growth, Herron said.
After receiving estimates, clients may have a better idea
about their possible capital gains taxes, revealing how much life insurance
they may need for those bills.
For example, a quote for a 15-year, $5 million term life
insurance policy for a healthy, nonsmoking 65-year-old woman in Nashville may
start around $1,500 per month, according to Quotacy, an online life insurance
However, a so-called permanent policy, offering coverage for
life, may be significantly more expensive. The cost varies by location, family
history, medical exam and other factors.
Of course, some assets, such as family businesses, may be
tougher to value, and if the laws change, there may be disputes over property
appraisals, he said.
“We’re getting everything ready to go,” said Herron.
If Biden’s plans happen, clients may want to be ready to
“pull the trigger” on their new estate plans, he said.
Then there’s the risk of spending money on appraisals and
Biden’s proposals fizzling out, Herron said. But it may be better than taking
no action and getting a costly surprise later.
Boosting life insurance may also be useful for businesses,
particularly companies owning real estate, said Hazard.
“Typically, there’s going to be quite a bit of appreciated
value there,” he said.
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