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Most advisor attention as it regards Biden’s tax plan has been about increased capital gains taxes and the unwinding of the “step-up basis” in the inheritance of assets. However, there is another major risk and complication on the horizon. That has to do with state level inheritance laws and how they interact with Biden’s plan. The federal government has no formal inheritance tax, but rather an estate tax. States, by contrast, often have inheritance taxes. The big difference between the two is that the estate tax is levied on the estate itself, whereas inheritance taxes are levied on the beneficiaries. That means that each individual is subject to a different level of taxes based on their income.
FINSUM: To be clear, the implications of this are quite large for HNW individuals, as they could face much higher federal estate taxes in addition to high state level inheritance taxes.
Biden is going after the mother of all tax hikes, though it is deftly spread across a number of different areas so it takes significant effort to add it all up. That is partly by design, but partly by necessity, since the wealthy tend to face taxes across a number of different parts of their financial lives—income, capital gains, corporate taxes, inheritance. The reality though is that if you combine all of Biden’s proposals, wealthy individuals living in states with high income taxes (like New York) could face tax bills of over 80% when accounting for all the areas above. This would include a new top personal income tax rate, new higher corporate tax rates, the elimination of “step-up basis” in inheritance taxes (and potentially a higher inheritance tax rate), and state taxes of over 14% in New York.
FINSUM: This only precedents for this level of taxation in US history were during World War I and World War II, when tax rates got into the 90% percent range. Even then, though, there were easy loopholes and deductions to allow individuals to avoid that top rate.
In its fourth-quarter earnings report…see the full story on our partner Magnifi’s site
Here is a tough fact for anyone to consider: 70% of wealthy families will lose their wealth by the second generation, and 90% will squander it by the third, according to a study by the Williams Group wealth consultancy. That means parents are fighting an uphill battle in trying to educate their children/heirs on how to manage finances. It sounds very simple to say, but education and learning the value of hard work from an early age are the best ways to ensure a successful continuation of wealth. Three top tips for clients are: be open with your family about wealth, its creation, and continuation; educate your family members about wealth creating/growth strategies; and put a lot of care into tax planning to avoid inheritance tax pitfalls.
FINSUM: Many people struggle with how to talk to their children about money, but as is often the case, the most difficult things to do are usually the most important ones.