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Wealth Planning
Tax changes are still up in the air, but will likely impact your wealth planning

The proposed tax legislation includes a variety of changes. We’ve grouped them here by some key dates:

Retroactive to September 13, 2021 (date proposal was released)*

  • Capital gains: Tax rate increased to 25% for certain “high-income” individuals with annual taxable income over $400,000 (individual) or $450,000 (joint).

  • Qualified small business stock exemption: Reduced from 75% or 100% to 50% for individuals with annual income over $400,000.

Date of enactment (likely the date the bill is signed into law)*

  • Grantor Trusts: Significant changes could alter and perhaps eliminate the ability to utilize grantor retained annuity trusts (GRATs), sales to intentionally defective grantor trusts (IDGTs), spousal lifetime access trusts (SLATs), irrevocable life insurance trusts (ILITs) and other common grantor trust strategies, as well as trigger estate tax inclusion of a grantor trust’s assets.

Year end (effective January 1, 2022)

  • Lifetime exemption: Reversion of the lifetime exemption ($10 million per individual, indexed for inflation; currently $11.7 million per individual) to the 2010 level of $5 million per individual, indexed for inflation (estimated at $6 million in 2022).

  • Roth conversion: Significant limitations will be placed on people with a taxable annual income over $400,000 (individual) or $450,000 (joint) to enter into a Roth IRA conversion (phased out over 10 years).

  • Income tax: Increase in the top marginal tax rate to 39.6% for individuals annually earning $400,000 individual/$450,000 joint.

  • Other & deductions: Increases in certain other tax rates and limitations on some deductions for certain high-income individuals.

*As currently proposed, but date may be changed to January 1, 2022.

As September closed, Democratic Party leaders sought approval for a multitrillion-dollar legislative agenda. The big-ticket items at stake include a roughly $1 trillion infrastructure bill and a $3.5 trillion spending plan focused on health care, education, family support and climate change initiatives.


To help pay for these ambitious programs, a series of tax hikes are on the table, including an increase in the corporate tax rate, which would go from 21% to as high as 26.5%, according to a recent proposal in the House of Representatives.


While some kind of tax increases are likely to be approved, investors should keep in mind that there likely isn’t enough support in Congress for a $3.5 trillion spending package. President Joe Biden has already acknowledged that the top-line number in the budget reconciliation bill will probably slim down to $1.5 trillion or $2 trillion, easing the need for new revenues.


Any new taxes will likely rest most heavily on corporations and wealthy individuals.


The increased revenue generated by the proposed tax increases probably will amount to about somewhere between $500 billion to $750 billion over the next decade, with most of the new burden falling on corporations.


The changes would also affect wealthy individuals, as well, but would be a much smaller slice of the revenue. Those making more than $400,000 a year will probably see the top income tax rate rise to 39.6%, and the capital gains tax could climb to 25% or so. Additionally, the proposal includes a 3% tax on adjusted gross income (AGI) over $5 million, as well as a 2% excise tax on stock buybacks, both of which might be more politically palatable.


Over the next month or two, the dilemma that Democrats face is how to shrink $3.5 trillion worth of big ambitions into a smaller package. Major spending priorities will collide and there remains a chance, given complicated disputes within the Democratic Party, that the entire legislative agenda collapses. Coming up empty-handed would be a political disaster for Democrats as they head toward the 2022 midterm elections, but this scenario can’t be ruled out.


Year-end planning could be complicated by the bills.


Traditional planning advice is to defer income and capital gains for as long as possible and to accelerate any deductions (typically, charitable gifts) into the current tax year. However, proposed tax changes would increase income and capital gains rates. Consider deferring gifts to charity to a future tax year, when tax rates may be higher.


If you have assets in a traditional IRA account, consider converting to a Roth IRA in 2021. The income tax due on the conversion will be assessed at current income tax rates, and the assets remaining in the Roth IRA can then grow income tax free, subject to proposed new Roth IRA caps. Remember, assets in a Roth IRA can be accessed by your heirs after your death without income tax consequences.


Consider accelerating large gifts to take advantage of today’s estate and gift tax.


Under current law, the lifetime exemption amount (now $11.7 million per individual) is scheduled to be cut in half in 2026, to $5 million indexed for inflation (approximately $6 million). The proposed reforms would begin in 2022.


If you want to make a larger gift, and you’ve worked with your Private Wealth Advisor and tax and legal professionals to assess your income tax planning options and financial capacity, consider taking advantage of the higher exemption amount. Such larger gifts can be made outright to loved ones or could fund advantageous grantor trust vehicles, which may soon be unavailable.


Treasury regulations finalized in 2019 provide that gifts made using the lifetime exemption amount that was in place in the year of the gift cannot be “clawed back” later if the exemption amount is decreased. This guidance also makes clear that the exemption is a use-it-or-lose-it proposition: If you gift $5 million in 2021 under the $11.7 million total and the exemption later decreases to $5 million, you have no remaining exemption.


Current low interest rates could begin rising soon.


Interest rates have remained low in 2021. That provides high net worth individuals with additional wealth transfer strategies that don’t eat into their lifetime exemption. Some clients have used the opportunity to make fixed low-interest loans to loved ones to cover the cost of a home, start an investment program or build a business.


Other clients are avoiding using their lifetime exemption by transferring appreciation on an asset using a grantor-retained annuity trust, or GRAT; this strategy is more effective in a low-rate environment. Some clients are selling a large asset to a grantor trust for a promissory note fixed at a low interest rate — a strategy that could be eliminated under the proposed reforms.


Under the current proposal, grantor trusts funded before the bill’s enactment date appear to be “grandfathered” for gift-tax purposes. However, the new rules could potentially affect “additional contributions.” That term is poorly defined, but might include things like annual gifts, annuity payments and asset substitutions. So, if you have an existing grantor trust (such as a GRAT, ILIT, SLAT or IDGT), or you’re considering funding a new trust like this in 2021, it’s critical to consult your attorney now.


Gifts of noncash assets to donor-advised funds, or DAFs, are generally deductible at the asset’s fair market value upon the date of the gift, so they are another option for clients worried about paying higher capital gains taxes on a future sale of assets. Many clients are also considering split-interest trusts (e.g., charitable lead and remainder trusts) because of the possibility of moving assets out of their taxable estate and retaining some benefit for themselves or their loved ones.


Your Private Wealth Advisor can discuss the pros and cons of each of these strategies, as well as the traditional rules of thumb that aren’t affected by potential changes to the law. Additionally, your Capital Group Private Client Services team can model different scenarios and evaluate the financial impact on your situation. Consult your tax and legal advisors before engaging in any tax or estate planning strategy as this material does not constitute legal or tax advice.



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