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5 Reasons to Consult a Financial Planner on New Tax Legislation

The new tax legislation proposed will undoubtedly impact the tax responsibilities of those individuals and families who have multi-generational wealth.  While the highest impact will be seen generally for our ultra-high-net-worth and highest-earning clients, at Ballast Advisors we know there are always unique dynamics at play for an individual or family’s financial plan that do not always align with generalizations about tax and policy impact.  

“It is these types of unique challenges that make financial planning for families important,” says Paul Parnell, founding partner at Ballast Advisors in the Twin Cities. “Regardless of your personal political stance, changes are coming to the tax code. As the proposed changes are making their way through Congress, it’s important to understand the potential impact and make appropriate adjustments to your financial plan.”

When a financial advisor examines an individual’s financial portfolio, it’s not just about preparing for the impact of Federal and state income tax or capital gains taxes on one’s investments. Maybe you had a banner year in business and stand to earn a significant bonus, or you unexpectedly lost a loved one in this pandemic and are the heir to the family farm.

Here are five reasons you should consult a financial planner on how the proposed tax changes may impact your financial plan and estate plans. 

You had a financial windfall.

We know that the pandemic wreaked havoc on our economy. However, if you are an executive or a shareholder with a large corporation, (minus a few exceptions) you likely had a very different year from most of the country. A Washington Post analysis found 45 of the 50 most valuable publicly traded U.S. companies turned a profit of the most tumultuous economic stretches in modern history. 

And while America’s small businesses struggled the most this year, according to the US Chamber of Commerce, sectors such as cleaning and delivery services, saw unprecedented growth.

“At the same time I have clients who have lost their businesses, I have clients in some industries who are seeing a sizable bonus, or other executive compensation incentives that they likely never accounted for,” says Parnell. “With income tax rate increases and rate bracket adjustments potentially seeing a rate as high as 39.6%, as well as proposed changes to Net Investment Income Tax (NIIT) a surtax on types of passive income, and increase the top capital gains rate, there are strategies to reduce the impact that should be discussed.”

You have a Mega IRA.

Additionally, reforms to Mega IRAs are being proposed at this time. There are discussions about requiring distributions from IRAs based on the account value. The specific value that would trigger a distribution is reportedly between $5,000,000 and $10,000,000 regardless of the account owner’s age.

The American Rescue Plan (passed in March of this year) limits the deductibility of compensation paid to publicly held companies’ five highest-paid employees (provided they earn over $1,000,000). The deduction limit would become effective in 2026. The current bill, if made law, would pull the effective date forward to 2022.

You’re ready to make a significant charitable impact.

At the same rate some have found unanticipated financial success among volatility, the events of our world have also helped some people prioritize what matters most and think more seriously about the legacy they want to leave. 

It’s no secret that charitable donations are one incentive to reduce AGI, and with tax rate increases likely, the time to start that family foundation or donor-advised fund is right now.

“A Donor Advised Fund is generally easy to establish. Highly appreciated stock can be contributed, allowing donors to contribute assets with long term capital gains, and carry over any amounts that can’t be deducted in the current year, for up to five years,” says Parnell. “Additionally, there aren’t any federal gift taxes due to the charitable gift tax deduction, and the federal estate taxes are minimized since the contributed funds are removed from the donor’s taxable estate. Also a new tax law may create another income tax bracket for those earning AGI over $5,000,000.”

Additionally, if it comes to pass, the new legislation changes the estate and gift tax rules that apply to grantor trusts to treat them like taxpayers distinct from the grantor for income tax purposes.

You got married.

2021 was also one of the busiest years for weddings in decades. According to experts at The Wedding Report, an industry research firm, says the number of U.S. weddings in 2021 is expected to hit 2.77 million—more than twice what we saw last year and a 30% increase over 2019. 

Under current law, a married couple would not be subject to the highest bracket until their income exceeded $628,301 ($523,601 for singles and HoH’s). Under the new law, the income tax increase applies to individuals earning over $400K, the proposed change also stands to compress the bracket for married couples with the maximum income tax bracket applies at much lower income levels.

“Couples should take some time to evaluate their new financial situation, including asking the classic questions for dual income households, like whether both spouses should work outside the home, or what the best tax filing status will be for their specific situation,” Parnell adds.

You stand to pass on or inherit a significant amount of wealth.

Research shows that as many as 70% of wealthy families lose their wealth after a generation. Multi-generational wealth planning helps ensure that a family’s wealth and legacy are properly managed and passed from one generation to the next, ensuring a healthy financial picture endures to benefit younger generations. 

There is a provision of the new tax changes that lots of estate planners are paying close attention to, which is the elimination of a tax-free basis step up at death, a provision that adjusts the value, or “cost basis,” of an inherited asset (stocks, bonds, real estate, etc.) when it is passed on, after death. This often reduces the capital gains tax owed by the recipient. 

The current change proposes taxing unrealized gains over $1 million when a single taxpayer dies (unrealized gains over $2 million for joint filers).

“In Minnesota where we are based, which is still largely agricultural, we see the challenges around inheritance of the family farm.” Inheriting a farm comes with its own set of special considerations, that are not just limited to taxation, and property transfer.  An exclusion may apply to family farms, as is one of the issues debated over this change.

Also under current law, the estate and gift tax exemption is $20,000,000 for married filers (indexed to inflation). Absent new legislation, this provision is currently scheduled to sunset on December 31, 2025, and revert to $10,000,000 (also indexed to inflation), however it’s possible if passed that the new tax law, would pull the expiration date forward to December 31, 2021.

Want more resources?

Any time you experience a significant change – positive or negative – to your financial situation, it’s a good idea to consult a financial professional on the long-term impact and opportunities.

While these tax changes are still being legislated, it’s critical to be proactive. Here are some additional resources to learn more:

https://www.forbes.com/advisor/investing/stepped-up-basis-biden-tax-plan/

https://www.forbes.com/sites/alangassman/2021/09/16/income-tax-law-changeswhat-advisors-need-to-know/?sh=1403ed6717ff

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This material is provided for general information and educational purposes only and should not be considered as investment advice. This information contained herein is as of the date of distribution. Some information contained herein derives from third-party sources Advisor believes to be reliable; however, the accuracy or completeness cannot be guaranteed. Past performance is not indicative of future results. Nothing contained herein constitutes as an offer or recommendation to buy or sell a particular security or investment product. Investing can have significant tax implications, please be sure to consult with a tax professional before entering any transaction that may have significant tax consequences.  Ballast Advisors, LLC is a registered investment advisor under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about the firm, including its services, strategies, and fees can be found in our ADV Part 2, which is available without charge upon request.