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How Tax Increases May Impact Your Succession Plan: Things You Should Know

25 May 2021

If you come from a long line of generational wealth, new laws may change your succession plan. In the past, the rules for succession planning for families have stayed relatively the same. Previously, when the original owner of a property or asset died, the asset would be passed down to an heir and they would not have to pay estate taxes or capital gains taxes until they sold the asset. President Biden’s Administration, however, plans to change how inherited wealth gets passed down from generation to generation. It’s essential to be aware of these new plans and when they might occur because it’s likely that they’ll impact the succession plan you already have in place. If you do not already have a plan in place, you should create one sooner rather than later with these new details in mind.

Potential Changes to Impact Succession Planning

The Biden Administration is working to enact the American Jobs Plan and the American Families Plan. The American Jobs Plan is supposed to create millions of jobs while rebuilding the country’s infrastructure. The American Families Plan aims to lower insurance coverage premiums, provide universal preschool to children aged 3 to 4, and more. 

Though these plans seek to better the economy, people, and infrastructure of the nation, the money to put them into action has to come from somewhere. These plans will receive funding by tax increases that will primarily be impacting the very wealthy. 

If the American Families Plan gets passed, it would raise the capital gains tax and change a rule that has been in place for many years. This rule is known as the “stepped-up basis.” Essentially, heirs do not have to pay capital gains tax on appreciated assets until after the asset is sold. Even then, they only have to pay the gains that occurred after the original owner’s death. 

This change, if enacted, would increase the capital gains tax rate by 19.6%, taking it from 23.8% to 43.4% Additionally, heirs would have to pay the capital gains tax on assets upon the original owner’s death instead of when they sell. There is a $1 million per person exemption on this tax increase, which is likely to cover most people; however, it will affect families with a net worth of around $2.6 million. 

In addition to the higher capital gains tax and the repeal of the “step-up in basis” rule, there may also be higher estate taxes as well as a higher income tax rate. The new proposed income tax rate for top earners would be 39.6%, a 3.8% increase. With all of these tax changes combined, the very wealthy could see tax increases as high as 61%. Some tax experts feel that imposing estate tax and capital gains tax upon death is unnecessary and unprecedented. If the law were to go into effect, many believe that Congress would overhaul payment on the estate tax. 

Some of these tax increases may happen even if Biden’s legislative actions are passed. In 2017 the Tax Cuts and Jobs Act was passed and in its passing, there were several tax cuts for individuals. Many of the benefits went to the top 1% earners, whom the new tax increases will be affecting as well. These tax cuts created by the 2017 act are set to lapse in 2025, making tax laws for top earners revert to what they once were. After these benefits lapse, the increases may not be as substantial as they would be with Biden’s legislation passed; however, there likely won’t be any more after-tax income growth like top earners saw with the Tax Cuts and Jobs Act. 

With all of these potential and coming changes to taxes, it’s important to have a CPA for you and your business.

Why You Need a CPA for Succession Planning

Because many new rules may be going into effect, it’s best to reexamine your succession plan. Whether it’s for your business or yourself, you need a succession plan that will be able to withstand these new tax changes. A CPA can help you with many different aspects of succession planning.  

CPAs can help you better understand the value of your business. When you are succession planning for your business, one of the most critical steps is assessing your business’ value. Whether you choose to sell, liquidate, or pass your business down to a successor, you should know your business’s value when creating your succession plan. 

A CPA can also help you create a Pro-forma statement, which are financial reports that use hypothetical events or assumptions about things that have happened in the past or things that may happen in the future. These statements can create a greater outlook on what will happen in your company which will be helpful when succession planning. 

Overall, a CPA can help you figure out how to best minimize taxes when it comes to transferring estates and assets. As we wait to hear what tax increases will be implemented, a CPA can help you prepare to make the necessary changes. CPAs can be guiding light when it comes to succession planning if you allow them to be. 

Deferring your deductions, converting your IRA, and using municipal bonds, are just a few strategies that may help you with the potential tax increase. If you need more guidance or insight about how to prepare or these strategies, you should contact The Rigby Financial Group.

Choose Rigby Financial Group for Your CPA Needs

The Rigby Financial Group is an experienced financial organization that can help you prepare for the potential tax increases among many other things. Many other CPA firms are rigid, unresponsive, and only contact you once a year. That is not the case at the Rigby Financial Group. When you use our services, we take a look at your business as a whole and craft you a customized financial plan that is catered to you and your best interests. 

Contact us to learn more about these potential tax increases and what you can expect in the upcoming future.

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