It seems that every time there is a change in presidential administrations, my office gets flooded with questions about the new President’s tax plan and how it will impact their estate strategy. While some clients are merely curious, others are deeply concerned about their finances and the legacy they want to leave behind. With the new Biden Administration just getting started (and the questions that are starting to come in), I thought it would be a good time to review a few of the major factors in play. I have seen through the transitions around the Clinton, Bush, Obama, Trump, and now Biden Administrations.

First, don’t panic… at least not until it is time to panic and we know what to panic about. Unfortunately, the U.S. is deeply entrenched in a 24-hour news culture, 24-hour for-profit news channels get more viewers by stoking viewer fears, and higher viewership translates into more advertising revenue. In other words, news stations make more money the more they get people to panic. The fact is no one knows what final tax legislation is going to look like until it is actually passed into law, and just because one politician is proposing something in their particular tax bill doesn’t mean it’s going to be in the final law. When we know what the real changes are, we can address them.

The second point, which is related to the first, is don’t believe the conclusions that 24-hour news seems to be jumping to, even if the particular provision they are discussing does come true. Be skeptical of conclusions, especially if you see yourself getting worked up over these conclusions. For example, political news commentators are now throwing out “President Biden wants to raise your taxes to 40%!” Suddenly, viewers are imagining they only get to keep 60% of their paychecks. What that actually means is that President Biden is proposing to raise the top income tax rate from 37% to 39.6% for all income over $518,401. That means this rate ONLY affects you if you earn more than $518,401 per year, and it ONLY applies to the amounts over $518,401. In other words, if you make $518,402 per year, then only the $1 over $518,401 is taxed at the 39.6% tax rate. (In terms of specific proposals, the President is proposing that payroll taxes also go up on incomes over $400,000.)

Third, there are some flat out lies and myths that circulate related to estate taxes in particular, and most of my clients don’t need to worry about them. Some of those myths are:

  • Myth: The government is going to take half of your estate because of the estate tax. Reality: The estate tax rate is between 18% and 40% ONLY FOR AMOUNTS GREATER THAN $11.7 MILLION. If your estate is worth less than $11.7 million, then you have nothing to worry about. (For couples using our revocable trust, this can be doubled to $23.4 million.)
  • Myth: We’ll lose the family farm to estate taxes! Reality: No actual family farm, as opposed to a huge agro-business, has ever been lost to estate taxes. The only family farm lost as part of an estate had to do with a deceased farm owner not paying any income taxes for more than a decade rather than estate taxes, and the farm was sold at auction to pay the back income taxes.
  • Myth: My spouse is going to pay a lot of money in estate taxes. Reality: U.S. citizen spouses never have to pay estate taxes when the first spouse passes on because of something called the “unlimited marital deduction.” There may be income taxes related to inherited retirement accounts if the appropriate options a spouse has aren’t exercised in a timely manner.

While there are always proposed changes when a new Administration takes office, nothing is certain until proposals become law. If there are major changes related to estates, I typically write articles in the newsletter and will possibly do a video or two so my clients stay informed. In the meantime, there’s no use in panicking over tax changes that may never come. Nonetheless, please check out my video on The Top Three Potential Changes to Estate Taxation that will discuss some theoretical changes and what they could mean… panic not included.