In the past, the rules for family succession planning have remained relatively the same. Previously, when the original owner of an asset or property dies, the asset is passed to an heir, and the heir was not required to pay property taxes or income taxes until the asset is sold. However, President Biden's government intends to change the way inherited wealth is passed down from generation to generation. If you come from a long line of generational wealth, the new laws can change your succession plan. It's also important to be aware of these new plans when they may arise, as they are likely to affect the succession plan you already have. If you don't have a plan yet, you should create it as soon as possible, taking these new details into account.
Potential changes to impact succession planning
The Biden administration is working to promote the American jobs plan and the American families plan. The American Jobs Plan is expected to create millions of jobs while rebuilding the country's infrastructure. The American Families Plan aims to reduce insurance premiums and provide universal preschool education for children aged 3-4 and older.
While these plans aim to improve the country's economy, people, and infrastructure, the money to implement them has to come from somewhere. These plans will be funded by tax hikes that will primarily affect the wealthiest.
If the American family plan is passed, it will increase 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." In essence, heirs do not have to pay capital gains tax on the assessed assets until the asset is sold. Even so, you only have to pay the profits made after the death of the original owner.
Additionally, heirs should pay capital gains tax on the assets upon the original owner's death rather than upon sale. This change, if implemented, would increase the capital gains tax rate by 19.6%, from 23.8% to 43.4%. There is a $1 million per person exemption for this tax increase, which is likely to cover most people; however, this will affect households with a net worth of around $2.6 million.
Besides the increase in capital gains tax and the repeal of the "step-up in basis" rule, there may also be higher property taxes and a tax rate on higher income. The proposed new tax rate for those with higher incomes would be 39.6%, an increase of 3.8%. With all of these tax changes combined, the wealthiest could see tax increases of up to 61%. Some tax experts consider that the imposition of wealth tax and capital gains in the event of death is unnecessary and unprecedented. If the law goes into effect, many believe Congress will reform inheritance tax payments.
Some of these tax increases could take place even if Biden's legislative action is taken. In 2017, the Tax Cuts and Jobs Act was passed, and with its approval, several tax cuts were made for individuals. These tax cuts created by the 2017 law will expire in 2025, bringing the biggest gains tax laws back to what they were. Most of the benefits have gone to the top 1% earners, who will also suffer from further tax increases. After these benefits expire, the increases may not be as large as with the passage of Biden legislation; however, there is likely to be no further increase in after-tax income, as was seen with higher incomes with the TCJA.
The importance of estate planning
Estate planning is the process of designating beneficiaries who will receive your estate in the event of premature death or disability. In general, a comprehensive real estate plan protects your heirs from paying excessive taxes on the assets you transferred. These are some of the reasons why real estate planning is so important.
Avoid disagreements between parents and relatives.
Ensures the timely distribution of assets to legitimate beneficiaries.
It gives you the peace of mind of knowing your loved ones are safe.
Minimizes the tax liability of your heir's property
Real estate planning prevents the distribution of assets to unwanted beneficiaries.
Planning asset allocation is a delicate and complex process. That's why hiring a chartered accountant is helpful in helping you and your lawyer when it comes to planning, documenting, and executing your will.
The importance of succession planning
Succession planning is one of the most common challenges faced by businesses, large and small. Even if you don't intend to leave a key position anytime soon, ongoing succession planning is necessary to protect the future of your business, and these are some of the reasons why succession planning is essential to business continuity.
Allows internal negotiation.
Create a training and development structure.
Prevents a decrease in employee performance and a problematic organizational structure.
Secure the financial future of your business
Succession planning prepares the next generation of leaders.
Preparing the business for the future is difficult, but not impossible. Once done successfully, succession planning is a great way to retain and develop qualified successors who can keep your business healthy for years to come.
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