Any new government brings with it the potential for major tax changes, and, while federal tax laws have been largely favorable to the ultra-wealthy as of late, Joe Biden’s presidency has already initiated several changes to tax laws. For ultra-high net worth investors, these changes can considerably increase their tax burden and restrict certain wealth transfer strategies.
The tax impact of all of these changes together could trigger hundreds or thousands of dollars in increased taxes. It’s important for high net worth (over $5 million in assets) and ultra-high net worth (over $30 million in assets) individuals and families to understand how these tax changes impact their unique financial standing so they can respond appropriately before these tax changes go into effect to best protect their wealth for generations to come.
Some of the most notable 2021 tax changes impacting the UHNW include:
Estate and Gift Tax Exemptions
Currently, the estate tax and gift exemptions are $11.58 million per person each and double if married. While Trump included a sunset provision for these exemptions to end in 2025, President Biden’s recent “Build Back Better” reconciliation spending program working its way through Congress proposes accelerating this provision to sunset in 2021 and lower these exemptions. President Biden has proposed a major reduction of this tax exemption, lowering the estate and gift tax exemptions to $5 million per person.
If these exemptions are lowered as a part of Biden’s 2021 tax changes, the estate tax will include many more people than it does today, allowing the government to make more from those who were previously exempt, primarily those with wealth between $10 and $20 million.
The proposed tax changes also include adjustments to individual retirement accounts (IRAs). With these changes, taxpayers who have an adjusted gross income over $400,000 (or $450,000 household income if filing jointly) would not be able to convert funds into a Roth IRA by 2032. The proposal also prohibits Roth conversion funds held in retirement plans with the exception of what is taxable by 2022.
Affected taxpayers would be prohibited from contributing to their retirement accounts when the total value of all retirement accounts is $10 million or more. Plus, they would be required to receive a 50% distribution of the excess funds over that $10 million limit in retirement accounts (except Roth accounts) and mandatory distribution of funds over $20 million in Roth accounts.
Ultra-Millionaire Wealth Tax
The Ultra-Millionaire Tax Act of 2021 proposes an additional wealth tax on the top 0.1% of American taxpayers, applying to households with a net worth of $50 million or more. This bill would impose a 3% tax on those making over $5 million in adjusted gross income.
It would also raise capital gains taxes to 25% from its current 20%, adding up to a total tax bite of 28.8% considering the current 3.8% surtax on net investment income.
Biden-Raised Income Tax
House Democrats are also proposing increasing the top marginal tax rate to 39.6% from its current 37% for anyone with taxable income over $400,000 or households over $450,000. This increase, if passed, would become effective on January 1, 2022.
It would also limit the tax benefit of itemized deductions to 28% of value for those with income over $400,000 and restore the Pease limitation, which reduces the value of certain itemized deductions by 3% for every dollar of taxable income over $400,000. Together, these two limits would reduce the value of deductions for the ultra-wealthy by 12.44%.
What Should UHNW Families and Individuals Do In Response?
Each of these proposed tax changes would have deep implications on any UHNW individual or family, and since most of these changes would go into effect on the first of the year in 2022, UHNW should act fast to make the appropriate changes to their wealth structure before the year’s end.
There are a number of wealth preservation strategies UHNW families can utilize to protect their assets from hefty tax increases that are soon to come:
One of the smartest and most advantageous moves you can make right now as a UHNW investor is giving gifts. Since the current lifetime exemption amount looks like it will be sunsetting early in 2022, greatly reducing this amount, it’s in your best interest to make large gifts if feasible. Consider gifting the annual exemption of $15,000 per person or $30,000 per couple, and even gifts as large as $5 million or more (ideally up to the full $11.58 million) to take advantage of the current elevated lifetime exclusion amount without having to pay gift tax. For couples, it would be most beneficial to use one spouse’s lifetime exclusion in its entirety rather than splitting the gift so you can maximize that spouse’s boosted exclusion as it is now.
Create a Trust
You could also put extra assets in a trust to offer similar protections while also allowing the grantor of the trust to specify terms of distribution to beneficiaries. Some families opt to use family limited partnerships or limited liability companies to hold these assets so parents can control operations and make transfers as needed.
Give to Charity
Another advantageous way to minimize your tax burden is through charitable giving vehicles, like a donor-advised fund. This strategy allows you to take your time deciding which charities you want to donate to while providing immediate tax benefits.
However, one thing you should consider is that these charitable income tax deductions may be more valuable when income taxes are higher, so delaying your charitable giving until 2022 may help you report a lower taxable income when it matters most.
Allocate Assets to Private Placement Life Insurance
Private placement life insurance (PPLI) is a niche strategy the wealthy can use to shield their fortunes from higher taxes. When structured correctly, PPLI allows your assets to escape taxes through private placement variable universal life insurance, where they receive the same favorable tax benefits as other life insurance assets.
Accelerate 2021 Income
You might also want to accelerate your 2021 income in what’s left of the year before higher tax rates go into effect for next year. One way to do this, for example, would be expediting a business sale transaction and negotiating a way to receive the money for this sale before the year ends.
Defer Tax Losses
Deferring your tax losses until 2022 would benefit you by offsetting your capital gains when the rate will likely go up from 20% to 25%. Claiming your capital losses against your gains would be more valuable next year than it would be this year.
Consider Making Lifetime Wealth Transfers
If it makes sense to do so, some families may find the most value in making lifetime wealth transfers before the end of 2021. If your family was planning to make a lifetime wealth transfer in the near future, accelerating it will minimize how much of your assets are hit by the raised estate taxes next year. You could do this either through a gift outright, surrendering power over the assets to the receiver, or you could transfer the wealth through an irrevocable trust so you can still set some parameters around how the funds are used and distributed.
Protecting Your Legacy Through Tax Planning
Wealthy taxpayers who have been considering estate minimization and wealth transfer strategies should act now. While many of these tax changes have yet to be confirmed, it’s safe to assume that this new presidency will have a definite impact on the tax burden of the wealthy. With so little time left in 2021, there’s not a minute to waste when it comes to protecting your assets and financial future.
For most UHNW families, the best response will be a combination of many strategies including the ones listed above, but what’s most important is starting to discuss your options now with your wealth advisory team to determine what the best options are for your unique financial picture. The more wealth someone has, the more value a qualified financial advisor can provide.
At Weber Global Management, we work with the extraordinarily wealthy to help them guard their legacy through careful tax planning strategies. Through a comprehensive, 360º view of your financial picture, we provide powerful advice on how to best minimize your tax burden through these changes and the changes yet to come.
Reach out to our team of wealth managers and tax advisors to get started today.