Top Ten Estate and Tax Planning Considerations for 2021

As we enter the last five months of the year, there are a multitude of planning considerations for business owners and wealthy individuals. With proposed changes in estate and tax laws through a reconciliation package towards the end of the year, having a plan in place with options is imperative.

Recognition of Capital Gains:
The Biden Administration is proposing to nearly double the top tax rate on long-term capital gains for those with annual income of more than $1 million a year. The top federal rate on capital gains would rise to 43.4% from the current 23.8%, after factoring in a 3.8% surtax. In addition, you need to figure in the applicable state tax. For California residents with annual income of more than $1 million, the tax rates will range from 11.3% to 13.3% at the higher levels of income.
The proposed elevation in capital gains rates brings up a multitude of considerations. The first consideration is one of timing capital gains transactions. The change in the rate will be made through the process of Reconciliation which is heavily being debated in Washington right now. The Biden administration indicates the change in rates will be effective April 28, 2021. When the conversation began regarding a raise in the capital gains rates it was generally assumed the rate increase would occur January 1, 2022, and there is still a strong push to use the later date for the increase. We will not know the effective date of the increase until the final Reconciliation bill is passed and even then, there may be litigation over the issue as to whether the law can be deemed effective at the earlier date.
So, what do you do if you are looking to close a transaction and you will otherwise be subject to the increased rate? You can go ahead and close your transaction and be ready to pay the higher tax rate if the bill is passed and made effective in April. Putting a transaction on hold until the end of the year may be the prudent thing to do to see if the higher rate will not be made effective this year.
Negotiating an elevated equity roll on the sale of a business hedging the rates will go down in 2025 may be a strategy worth considering if the deal is too good to pass on in 2021. If your annual income can be managed under $1 million you may consider selling a company with a combination of an equity roll and an installment sale with decreased installment payments in the first three to four years of the transaction. If you have stock in a “C” corporation and you qualify for what is referred to as “1202” treatment, you may have no issue at all if you can convince a buyer to buy your stock. There are many other considerations, but you must have your plan in place now if you are considering selling a capital asset in 2021.
Step-up in Basis Planning:
The tax basis in inherited assets is “stepped-up” to the fair market value upon the death of a decedent. The Biden Administration is proposing to eliminate the step-up so the basis will simply carry over to the heirs. Furthermore, the Biden Administration is considering an elimination of discounting the value of assets based upon marketability and control.
Often, planners will not recommend installment sales to irrevocable trusts because the step-up is more valuable than the freeze on the value of the estate freeze; even when taking into consideration the discount in valuation. If the step-up is eliminated and there will be no further discounting next year, the time to proceed with installment sales to irrevocable trusts is now. Discounting is often taken up to 30% of the value of an asset. This basically means elimination of 30% of an asset from the taxable estate which is substantial. If you have been delaying advanced estate planning, you should reconsider at this time and sit down with your advisors.
Electing Out of Installment-Sale Method:
If capital gains rates are to be raised and you have already closed a transaction under an installment sale, you may consider electing out of the installment-sale method in 2021 and pay the tax now. If you do not elect out of the installment-sale method, you will be stuck paying the higher rates when you receive payments moving forward. In order to elect out of the installment method for a 2020 transaction, the election must be made by October 15, 2021.
New Entity Formation:
Above, I mention a “1202” transaction. Under Internal Revenue Code (“IRC”) section 1202, a shareholder of a qualified “C” corporation can receive tax free treatment on the sale of their shares. Furthermore, the lower tax rate applicable to “C” corporations as opposed to individuals may create some great planning opportunities. For instance, if you plan on taking on debt in the corporation, you will be paying that debt off at a lower tax rate than the individual rate which will be incurred with a flow-through entity such as an “S” corporation or LLC. Even if the corporate rate is raised through the Reconciliation bill to 25% or 28%, you are at a substantially lower rate than the individual rate.
Qualified Opportunity Fund:
If the capital gains rates are going to double and you desire to close on a transaction, consider reinvesting the gains in a qualified opportunity fund (“QOF”). If structured properly, payment of capital gains tax can be deferred until 2026. In addition, if an investor holds an interest in a QOf for 10 years, all of the appreciation in the value of the investment can be realized without paying capital gains tax.
Employee Stock Option Planning:
If the sale of a company is being considered for 2021, but the doubling of capital gains tax is made effective as of April so that the elevated tax cannot be avoided, an ESOP may be the answer. If you can structure a transaction so the payments to the owner/seller are tax free, even though the sales price for the company is less than it would have been to a third party, the owner/seller may realize a larger return. Additionally, in 2022 ESOP planning will become much more common given the higher capital gains tax.
Maximizing Use of Unified Gift and Estate Tax Exclusion:
Currently the lifetime exclusion from estate tax is $11.7 million; $23.4 million for married couples. An individual can also give away $11.7 million and not pay tax. The Biden administration is proposing to lower that estate tax exclusion to $3.5 million or possibly $5.3 million per person with the gross value of an estate in excess of those levels to be taxed at 45% or possibly higher. The current estate tax rate on the gross amount of an estate in excess of the exemption amount is a flat 40 percent. The administration is also proposing to lower the lifetime gift tax exclusion to $1 million.
If you are single and the gross value of your estate is in excess of $3.5 million or you are married and the gross value is in excess of $7 million, you should consider gifting before the end of 2021. Gifting can come in many forms and the use of irrevocable trusts can not only be an invaluable tool to complete your gifting, but additionally, provide added asset protection.
If you complete gifting in 2021 and the gift and estate tax exclusion goes to lower levels, there will be no claw-back by the government. The Treasury Department and the Internal Revenue Service today issued regulations in 2019 confirming that individuals taking advantage of the increased gift and estate tax exclusion amounts in effect from 2018 to 2025 will not be adversely impacted when and if the exclusion amount drops.
Life Insurance Planning:There is a proposal in both the House and the Senate to tax capital gains when a gift is made and when a person dies. If there is no step-up in basis and capital gains are imposed, assets will likely have to be sold to cover the tax. Leaving a low basis asset to heirs may not be a possibility unless there is cash to cover the tax. Life insurance will be a preeminent planning tool if the current proposals become law. Consideration should be given to private placement life insurance contracts in addition to traditional life insurance.
Incomplete Non-Grantor Trust Planning:
With elevated taxes at all levels, if you live in a high tax state, you have to consider the possibility of avoiding state tax when selling intangibles. Incomplete non-grantor trusts provide the opportunity to avoid state tax in many states including California when selling stock in a company or other intangibles. This is an invaluable tool in shaving off some of the elevated tax burden.
Planning Integration; Asset Protection:
As you consider tax and estate planning in 2021, do not forget the need to integrate that planning with your asset protection plan.
California has once again pushed the envelope in complicating the employer/employee relationship and making it nearly impossible for an employer to operate in California.
First, if an employer does not provide an employee with a compliant meal or rest period, Labor Code section 226.7(c) requires the employer to “pay the employee one additional hour of pay at the employee’s regular rate of compensation.” In the recent case of Ferra v. Loews Hollywood Hotel, LLC, the California Supreme Court held that the “additional hour of pay” for meal or rest period violations must encompass all non-discretionary payments, as well as hourly wages. Thus, if an employer pays an employee non-discretionary incentive pay or bonuses, or commissions, those amounts must be included in determining the “hour of pay” the employer owes to the employee for a meal or rest period violation. This calculation has to be done with every missed meal or rest period.
This decision is to be applied retroactively which means virtually every employer in California is likely to be sued in the next twelve months. In rejecting the concern over the retroactive nature of the decision and how it will cause employers significant exposure, the Court reasoned that “it is not clear why we should favor the interest of employers in avoiding ‘millions’ in liability over the interest of employees in obtaining the ‘millions’ owed to them under the law.”
In another recent decision, a California court has opened the door as to who is allowed to file a PAGA claim. In Johnson v. Maxim Healthcare Services, Inc. (“Johnson”), the California Court of Appeal, Fourth District, Division One out of San Diego has held that an employee, whose individual claim is time-barred, may still pursue a representative claim under PAGA. Therefore, any aggrieved employee can bring a PAGA action at any time, regardless of when the employee was personally aggrieved. If you had an employee leave the company ten years ago, that employee can now file a PAGA claim against your company.
In the process of reviewing your estate and tax planning as the year comes to a close, make sure everything is tied out to your asset protection plan. Common trusts used to eliminate estate tax or to mitigate state income tax can be in the form of asset protection trusts.

There are five months left in 2021 and a lot of things to consider before the year ends. If you are going to make any changes to your estate, tax, asset protection or succession plans before the end of the year, you need to get started now. If you would like to set up a planning meeting with my group, please contact my administrative assistant, Sorina Cannon, to set an appointment.

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Recognition of Capital Gains:
The Biden Administration is proposing to nearly double the top tax rate on long-term capital gains for those with annual income of more than $1 million a year. The top federal rate on capital gains would rise to 43.4% from the current 23.8%, after factoring in a 3.8% surtax. In addition, you need to figure in the applicable state tax. For California residents with annual income of more than $1 million, the tax rates will range from 11.3% to 13.3% at the higher levels of income.
The proposed elevation in capital gains rates brings up a multitude of considerations. The first consideration is one of timing capital gains transactions. The change in the rate will be made through the process of Reconciliation which is heavily being debated in Washington right now. The Biden administration indicates the change in rates will be effective April 28, 2021. When the conversation began regarding a raise in the capital gains rates it was generally assumed the rate increase would occur January 1, 2022, and there is still a strong push to use the later date for the increase. We will not know the effective date of the increase until the final Reconciliation bill is passed and even then, there may be litigation over the issue as to whether the law can be deemed effective at the earlier date.
So, what do you do if you are looking to close a transaction and you will otherwise be subject to the increased rate? You can go ahead and close your transaction and be ready to pay the higher tax rate if the bill is passed and made effective in April. Putting a transaction on hold until the end of the year may be the prudent thing to do to see if the higher rate will not be made effective this year.
Negotiating an elevated equity roll on the sale of a business hedging the rates will go down in 2025 may be a strategy worth considering if the deal is too good to pass on in 2021. If your annual income can be managed under $1 million you may consider selling a company with a combination of an equity roll and an installment sale with decreased installment payments in the first three to four years of the transaction. If you have stock in a “C” corporation and you qualify for what is referred to as “1202” treatment, you may have no issue at all if you can convince a buyer to buy your stock. There are many other considerations, but you must have your plan in place now if you are considering selling a capital asset in 2021.
Step-up in Basis Planning:
The tax basis in inherited assets is “stepped-up” to the fair market value upon the death of a decedent. The Biden Administration is proposing to eliminate the step-up so the basis will simply carry over to the heirs. Furthermore, the Biden Administration is considering an elimination of discounting the value of assets based upon marketability and control.
Often, planners will not recommend installment sales to irrevocable trusts because the step-up is more valuable than the freeze on the value of the estate freeze; even when taking into consideration the discount in valuation. If the step-up is eliminated and there will be no further discounting next year, the time to proceed with installment sales to irrevocable trusts is now. Discounting is often taken up to 30% of the value of an asset. This basically means elimination of 30% of an asset from the taxable estate which is substantial. If you have been delaying advanced estate planning, you should reconsider at this time and sit down with your advisors.
Electing Out of Installment-Sale Method:
If capital gains rates are to be raised and you have already closed a transaction under an installment sale, you may consider electing out of the installment-sale method in 2021 and pay the tax now. If you do not elect out of the installment-sale method, you will be stuck paying the higher rates when you receive payments moving forward. In order to elect out of the installment method for a 2020 transaction, the election must be made by October 15, 2021.
New Entity Formation:
Above, I mention a “1202” transaction. Under Internal Revenue Code (“IRC”) section 1202, a shareholder of a qualified “C” corporation can receive tax free treatment on the sale of their shares. Furthermore, the lower tax rate applicable to “C” corporations as opposed to individuals may create some great planning opportunities. For instance, if you plan on taking on debt in the corporation, you will be paying that debt off at a lower tax rate than the individual rate which will be incurred with a flow-through entity such as an “S” corporation or LLC. Even if the corporate rate is raised through the Reconciliation bill to 25% or 28%, you are at a substantially lower rate than the individual rate.
Qualified Opportunity Fund:
If the capital gains rates are going to double and you desire to close on a transaction, consider reinvesting the gains in a qualified opportunity fund (“QOF”). If structured properly, payment of capital gains tax can be deferred until 2026. In addition, if an investor holds an interest in a QOf for 10 years, all of the appreciation in the value of the investment can be realized without paying capital gains tax.
Employee Stock Option Planning:
If the sale of a company is being considered for 2021, but the doubling of capital gains tax is made effective as of April so that the elevated tax cannot be avoided, an ESOP may be the answer. If you can structure a transaction so the payments to the owner/seller are tax free, even though the sales price for the company is less than it would have been to a third party, the owner/seller may realize a larger return. Additionally, in 2022 ESOP planning will become much more common given the higher capital gains tax.
Maximizing Use of Unified Gift and Estate Tax Exclusion:
Currently the lifetime exclusion from estate tax is $11.7 million; $23.4 million for married couples. An individual can also give away $11.7 million and not pay tax. The Biden administration is proposing to lower that estate tax exclusion to $3.5 million or possibly $5.3 million per person with the gross value of an estate in excess of those levels to be taxed at 45% or possibly higher. The current estate tax rate on the gross amount of an estate in excess of the exemption amount is a flat 40 percent. The administration is also proposing to lower the lifetime gift tax exclusion to $1 million.
If you are single and the gross value of your estate is in excess of $3.5 million or you are married and the gross value is in excess of $7 million, you should consider gifting before the end of 2021. Gifting can come in many forms and the use of irrevocable trusts can not only be an invaluable tool to complete your gifting, but additionally, provide added asset protection.
If you complete gifting in 2021 and the gift and estate tax exclusion goes to lower levels, there will be no claw-back by the government. The Treasury Department and the Internal Revenue Service today issued regulations in 2019 confirming that individuals taking advantage of the increased gift and estate tax exclusion amounts in effect from 2018 to 2025 will not be adversely impacted when and if the exclusion amount drops.
Life Insurance Planning:There is a proposal in both the House and the Senate to tax capital gains when a gift is made and when a person dies. If there is no step-up in basis and capital gains are imposed, assets will likely have to be sold to cover the tax. Leaving a low basis asset to heirs may not be a possibility unless there is cash to cover the tax. Life insurance will be a preeminent planning tool if the current proposals become law. Consideration should be given to private placement life insurance contracts in addition to traditional life insurance.
Incomplete Non-Grantor Trust Planning:
With elevated taxes at all levels, if you live in a high tax state, you have to consider the possibility of avoiding state tax when selling intangibles. Incomplete non-grantor trusts provide the opportunity to avoid state tax in many states including California when selling stock in a company or other intangibles. This is an invaluable tool in shaving off some of the elevated tax burden.
Planning Integration; Asset Protection:
As you consider tax and estate planning in 2021, do not forget the need to integrate that planning with your asset protection plan.
California has once again pushed the envelope in complicating the employer/employee relationship and making it nearly impossible for an employer to operate in California.
First, if an employer does not provide an employee with a compliant meal or rest period, Labor Code section 226.7(c) requires the employer to “pay the employee one additional hour of pay at the employee’s regular rate of compensation.” In the recent case of Ferra v. Loews Hollywood Hotel, LLC, the California Supreme Court held that the “additional hour of pay” for meal or rest period violations must encompass all non-discretionary payments, as well as hourly wages. Thus, if an employer pays an employee non-discretionary incentive pay or bonuses, or commissions, those amounts must be included in determining the “hour of pay” the employer owes to the employee for a meal or rest period violation. This calculation has to be done with every missed meal or rest period.
This decision is to be applied retroactively which means virtually every employer in California is likely to be sued in the next twelve months. In rejecting the concern over the retroactive nature of the decision and how it will cause employers significant exposure, the Court reasoned that “it is not clear why we should favor the interest of employers in avoiding ‘millions’ in liability over the interest of employees in obtaining the ‘millions’ owed to them under the law.”
In another recent decision, a California court has opened the door as to who is allowed to file a PAGA claim. In Johnson v. Maxim Healthcare Services, Inc. (“Johnson”), the California Court of Appeal, Fourth District, Division One out of San Diego has held that an employee, whose individual claim is time-barred, may still pursue a representative claim under PAGA. Therefore, any aggrieved employee can bring a PAGA action at any time, regardless of when the employee was personally aggrieved. If you had an employee leave the company ten years ago, that employee can now file a PAGA claim against your company.
In the process of reviewing your estate and tax planning as the year comes to a close, make sure everything is tied out to your asset protection plan. Common trusts used to eliminate estate tax or to mitigate state income tax can be in the form of asset protection trusts.