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Major tax changes in proposed legislation

submitted by Richard Wilson, Esq.

The American Families Plan (the “Act”) makes two changes in income taxes for individuals.

No step-up in basis at the death of a taxpayer.  If any asset in the estate is valued in excess of $1 million, the excess amount is taxed for income tax purposes at 43.8%.  For example, if the excess is $100,000, the tax would be $43,800.

The capital gains tax rate will now be 43% in two circumstances: 

(1) if the taxpayer’s income for the year is at least $1 million, any capital gain realized that year is taxable at 43.8%; and

(2) if the taxpayer realizes a capital gain of more than $1 million, that excess is taxable at 43.8%.

However, there are a few practical solutions available to the savvy taxpayer to mitigate these potential negative tax consequences.  While the substance of these solutions cannot be properly addressed in this article, taxpayers should be aware of the following estate planning opportunities and vehicles:

  • Life insurance held in an irrevocable life insurance trust (ILIT)
  • Selling assets to an intentionally defective grantor trust (IDGT)

While the proposed legislation, if passed, will significantly change the outcomes for certain taxpayers both at death and upon the sale of capital assets, proper planning can serve to mitigate these potential negative outcomes in the face of ever-evolving tax legislation.

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