Estate Plan & Qualified Small Business Stocks

Historically the highest Federal income and estate tax levels were from 1944 to 1945, with the former being as high as 94% and the latter being 77%.

Currently in 2022, the highest Federal income tax rate is 40.8% and estate tax is 40%. Given our national deficit, increased tax rates are anticipated, and the only difference is the how to raise taxes and who will bear more of the burden.

Current Administration’s Build Back Better plan may take several small legislations to hike up the rate, or rather, impose “surtax” over certain taxable income thresholds. The house bill, H.R. 5376 (10/28/2021) has the following proposals.

48.8%: Top Ordinary Income Tax Rate for Trusts and Estates

• 37% ordinary income tax for taxable income greater than $13,450
  
  
• 3.8% surtax on greater of net investment income or specified net income for MAGI greater than $13,450
  
  
• 5% additional surtax for MAGI greater than $200,000
  
  
• 3% additional surtax for MAGI greater than $500,000
  
  

31.8% Top Long-Term Capital Gains/Qualified Dividends Rate for Trusts and Estates

• 20% long-term capital gains/qual. dividends tax for taxable income greater than $13,750
  
  
• 3.8% surtax on greater of net investment income or specified net income for MAGI greater than $13,450
  
  
• 5% additional surtax for MAGI greater than $200,000
  
  
• 3% additional surtax for MAGI greater than $500,000

As such, proactive planning is recommended to mitigate the potential impact of higher taxes.

We can consider the following tax-efficient strategies:

1. Make gifts outright or in trust utilizing current gift/estate/GST tax exemption amounts, currently $12.06 million per person, $24.12 million per married couple.
   
   
2. Consider Spousal Lifetime Access Trusts (SLATs) and strategies that benefit from current low-interest rates (e.g., Intra-family Loans, GRATs, IDGTs, SCINs, CLTs).
   
   
3. Take advantage of valuation discounts.
   
   
4. Convert traditional IRAs to Roth IRAs—consider deduction for charitable gifts to offset tax on Conversion.
   
   
5. Fund donor-advised fund/private foundation with low basis stock.
   
   
6. Sell low-cost basis investments and/or business in order to lock in current capital gain rates—if it makes sense for your overall wealth plan and there is an intent to sell in the near future.
   
   The same H.R. 5376 has placed limitations on certain special rules for Section 1202 Gain for Qualified Small Business Stocks (QSBS).
   
   
   

• After Sep. 13, 2021, only baseline 50% exclusion in section 1202(a)(1) for:
  • Taxpayers with AGI of $400k or more
  • Trust or estate regardless of AGI
    

• Effective Date
  • Sales or exchanges on or after Sep. 13, 2021, unless a written binding contract is in effect on Sep. 12, 2021, and not materially modified thereafter