An out-of-date estate plan could give money to the wrong people. For instance, if you fail to update your estate plan after divorce, your ex could inherit assets. An out-of-date plan could omit people you care about and lead to family disagreements. For example, you have a third child but die before adding them to your list of beneficiaries. The other two children might not feel obliged to share.
An out-of-date estate plan benefits one entity most of all: the Internal Revenue Service (IRS). Estate plans help you pass your wealth to the next generation in the most tax-efficient way possible. When tax rules change, the IRS can reap the rewards at the expense of your family.
The American Families Plan could hurt your current estate plan
President Biden’s American Families Plan outlines two significant tax hikes:
- You will need to pay capital gains tax at death on the growth of assets: You buy land, which increases in value over your lifetime. You pass it onto your daughter. If she decides to sell it, she will pay capital gains tax based on what she sells it for, minus the land’s value when she inherited it. The proposed change would make capital gains tax payable when you die. The value would be based on what it is worth at the time of your death minus what you paid for it. It would apply to assets that have increased in value by $1 million or more.
- The capital gains tax rate will increase: Currently, no one pays more than 20% capital gains tax. The plan would increase the rate for those whose estates are worth more. The proposal suggests a top rate of 43.4%
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While these tax changes have not yet become law, they signal serious intent to claim more tax from wealthy individuals. Seek legal help to understand your options and update your estate plan to account for tax changes.