Politics, Taxes, and Planning

Politics, Taxes, and Planning: Wealth Taxes Join Capital Gains Taxes, Estate Taxes, and Estate Planning on the Public Agenda 

In America today, tax policy is a matter of ongoing dispute between the two major parties. Differences about the goals and degree of taxation are everywhere you look in American politics at the federal, state, and local levels. And these disputes are unlikely to be resolved any time soon.

And the differences are getting starker.

Wealth Tax Proposals and Challenges

Proposals for wealth taxes are now joining debates about increasing capital gains taxes and estate taxes. In California, a bill has been introduced proposing a 0.4 percent tax rate on an individual or couple’s net worth above the $30 million threshold. Unlike capital gains taxes, which can be readily calculated by referring to a specific cost basis, a wealth tax must take into account all assets which comprise a person’s net worth.

Calculating wealth taxes can raise challenges. Suppose, for example, a state aims to tax a person’s total assets. It could be difficult to assess the value of the person’s illiquid assets. It could be difficult to tax assets the person holds out of state. And if the person has recently left the state, how, and over what period of time prior to departure, would the value of the person’s in-state assets be assessed? Other issues related to wealth tax legality and constitutionality can also be expected. 

Estate Planning Considerations

While wealth taxes are in the early stages of debate, the tug of war over estate taxes is one of the bitterest partisan disputes.  So is the debate over capital gains taxes. At the federal level, when one party manages to get a change passed, the other party makes repealing that change a new priority. Nothing is ever really settled.

When it comes to estate planning and financial planning, it’s important to recognize that because of these deep political divisions, the rules of the tax game are not stable or predictable. So estate planning should seek solutions that work effectively no matter how the rules change. The good news is that once wealth is moved out of the estate, the battle over new rules is less relevant.

If someone has accumulated a significant amount of wealth through hard work and wants to transfer that wealth to the next generation, trusts and trust-owned entities, as well as charitable strategies, are often worth considering. Strategies like Charitable Lead Annuity Trusts or Grantor Retained Annuity Trusts, which can efficiently transfer assets with future growth potential to younger generations, may be worth considering. Independent trustees, scrupulous record-keeping, and some limits on control over wealth are usually part of the estate planning trade-off. So the degree to which you want to move assets out of your estate during your lifetime as a means of preserving wealth for your heirs or other beneficiaries requires balancing competing interests.

And because tax law is now unpredictable, estate planning opportunities are temporary, and they need to be utilized when they’re available.  Witness that there were many significant estate planning opportunities created by the 2017 tax law and then modified by the SECURE Act in 2019. Increasingly, the challenge is to find permanent benefits in temporary situations.

And it’s hard to do permanent planning. It’s now critical to be permanently planning. It’s been conventional wisdom that an estate plan should be reviewed every ten years or so. But now, in an era of such ongoing partisan conflict over estate taxes, that can be a costly mistake.

Also, the SECURE Act, by virtually eliminating the “Stretch IRA,” has made it even more important to consider the full toolkit of estate planning strategies when thinking about both retirement planning and transferring wealth to the next generation.

The SECURE Act, estate taxes, capital gains taxes, wealth taxes all point to the importance of staying prepared as tax policy continues to evolve. Financial planning and estate planning reviews, done regularly, can identify both risks and opportunities that our elected representatives are creating.

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