Musings from the CEO: Pay the Darn Light Bill!

Mike Hoffman, Esq., CPA

I’ve had the privilege of working with some of the finest business people in the world over the last 45 years.  During that period of time, we have built a superb law firm organization to service the income tax, business and estate planning needs of these fine families and businesses.

It is safe to say that it never ceases to amaze me how short-sighted brilliant people can be.  While they would never consider not paying the light bill to keep their families warm and safe, their businesses open and their employees at work, they will ignore or postpone appropriate planning to protect that business they have created; the very source of their livelihood and financial wealth.

President Biden was elected in November, 2020, much to the chagrin of many in business. I was personally assured innumerable times that it would never happen!  President Biden ran on an agenda to increase taxes, regulation, immigration and spending. He has three major pillars of legislation to accomplish during his first term. The first pillar was accomplished rather quickly; his Covid and vaccination mandates, then reversing almost all of Donald Trump’s Executive Orders dealing with pipelines, border security, tariffs and cost controls.  The second, his infrastructure spending, has been bogged down since spring.  Biden has had to break it down into parts, passing the first part a month or so ago.  The remainder, the so-called Build Back Better Act, is currently bogged down in the Senate, and Senator Manchin indicated on Face the Nation that it was a “No”, as far as he is concerned.  Senator Schumer is still calling for a vote, both this year and when Congress returns after its holiday recess.  We will see how that plays out.

The third leg of Biden’s legislative stool is his tax reform.  We have not gotten to any tax reform, only bits and pieces attached to various spending, in order to cover the costs politically. Sure, Biden may use up much political capital with the remaining fight over the infrastructure legislation, but I doubt he will abandon his important goal of tax reform.

Let’s visit some of the things that President Biden has told us, either during his campaign or when these items have arisen during the infrastructure bill discussion:

1. Reduce the federal gift and estate tax exemption to $3.5M from its current $12M.
2. Increase the federal gift and tax rate from 40% to 60%.
3. Do away with stepped-up basis at death.
4. Tax appreciated property at death at a capital gains rate.
5. Eliminate valuation discounts that are applied in a gift or estate tax context.
6. Include grantor trusts in the taxable estates of the grantor.
7. Limit the amount of annual gift exclusions available each year to a family.
8. Tax transactions between a grantor and his grantor trust, and accelerate the taxability of all installment gains.
9. Impose new limits on retirement plan assets and increase required minimum distributions for high income taxpayers with large retirement plan balances.
10. Impose new prohibited investment and self-dealing rules for retirement account assets.

Obviously, there is no assurance that any of these reforms will come to pass, and if they do, what their effective dates will be.

I have said many times that the federal estate tax is a voluntary tax. With appropriate planning, it can be eliminated. However, to intelligent planners and their clients, this will always require the use of a variety of trusts.  Trusts are wonderful things, so long as they are properly drafted and administered in the way they were intended. Trusts can protect property from the creditors and ex-spouses of beneficiaries and keep property out of the beneficiary’s taxable estate. In Georgia, trusts can run for 360 years, or approximately 10 generations, providing the structure or blueprint to better assure the success of future generations in managing property (structure affects behavior), avoid probate, regardless of what state or territory the beneficiary is residing when he or she dies, can eliminate the applicability of generation-skipping transfer tax, can provide significant income tax flexibility in choosing which beneficiaries income tax brackets are used to tax income, and provide some continuity of control as families and their businesses evolve from generation to generation. Trusts can and should provide significant flexibility to react to changing family circumstances, tax law and estate law.

After the core documents have been addressed (typically a will, power of attorney, and general and health care directive), the second phase of estate planning generally involves a deeper dive to consider what it is that has produced the wealth.  For many wealthy families, that is the family business.  What is to be done with the family business, what is the exit strategy, how do we keep the family business from imploding through lack of adequate planning, etc.

Whether or not the Biden wish list of tax proposals comes to fruition, the sooner the planning aspect of the estate plan is initiated and implemented, the more positive effect it will have over ensuing generations; preserving value, tax savings, and giving future generations a better chance to build and enhance what they’ve inherited.

You wouldn’t neglect to pay the light bill in order to keep things running; do not procrastinate on the necessary planning to protect that which you are building.  A failure to plan is a plan to fail, however, a plan with a good foundation will continue to evolve, spread and radiate to and for future family and loved ones.

Merry Christmas and Happy Holidays!

If you have any questions regarding this or any other estate, corporate or tax matter, please email us at info@hoffmanestatelaw.com or call us at 404-255-7400.