The Important Role Appraisals Play in Trust and Estate Matters During Uncertain Times

The Important Role Appraisals Play in Trust and Estate Matters During Uncertain Times

If there was ever a more important time to consider revisiting your estate plan, this is it. The Department of the Treasury’s release of the budget document commonly known as the Green Book reiterates the Biden Administration’s plan for tax changes that could have profound impacts on your estate and beneficiaries. From increases to the top income bracket to potential changes in the long-term capital gains tax treatment, high net worth families may be faced with additional tax liabilities on the assets they hold or plan to transfer through their estates.

Estates can be prepared for potential changes by understanding both what changes could be on the horizon that affect estate value and the value of the assets held by the estate. An appraisal could help with the latter, and there are some additional steps to ensure you have the quality information you need for decision-making, which will be the focus of this article.

Changes on the Horizon

President Biden targeted several areas for tax reform during his presidential campaign, which appeared again in the General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals. The Green Book tentatively sets the date for all these tax changes as Jan. 1, 2022, unless otherwise specified. A brief summary of those potential changes follows:

  • Change in top income tax bracket – This change would revert the top individual income tax rate for taxable incomes above $400,000 from 37% under current law to the pre- tax reform law level of 39.6%. Taxpayers with incomes over $1 million would pay a tax of 43.4% on both short-term and long-term capital gains.
  • Change in tax rate on long-term capital gains – Taxes on long-term capital gains and qualified dividends would be at the ordinary income tax rate of 39.6% on income above $1 million and the change would eliminate step-up in basis for capital gains taxation. This would be effective “retroactive to the date of announcement” according to the Green Book.
  • Elimination of capital gains step-up at death – Transfers of property by gift or on death would no longer be sheltered from taxation at the time of the transfer. Under the proposal, the excess of the property’s fair market value on the transfer date over the transferor’s basis in the property would be deemed realized as capital gains by the transferor. Additionally (effective Dec. 31, 2030), gains on property that have not been the subject of a recognition event in the past 90 years would be deemed realized when transferred to or from a trust (other than a grantor trust), partnership, or other non-corporate entity.
  • Reduction in lifetime and estate gift tax exemption – This would expand the estate and gift tax by restoring the rate and exemption to 2009 levels, which were $3.5 million.
  • Increase in top estate and gift tax rates – Wealthy families could face combined tax rates of as much as 61% on inherited wealth.
  • Elimination of 1031 exchange – The proposed change to IRS Section 1031 would affect real estate investments where the profits exceed $500,000 for exchanges completed beginning Jan. 1, 2022.
  • Cap on itemized deductions – This would cap the tax benefit of itemized deductions to 28% of value for those earning more than $400,000, which means that taxpayers earning above that income threshold with tax rates higher than 28% would face limited itemized deductions. It also would restore the Pease limitation on itemized deductions for taxable incomes above $400,000.
  • Limitation on deduction for retirement plan contributions – The tax deduction for contributing to a 401(k) would be replaced with a tax credit. This 401(k) change would likely result in high earners getting less of a tax break on their 401(k) savings.

The following provisions did not appear in the Green Book but have been cited for change by the Biden administration:

How an Appraisal Helps with Planning

Aside from working with a tax specialist and legal team to put the right plans in place to navigate these potential changes, undergoing an appraisal for trust and estate matters is key to saving tax dollars for your gift or estate tax situation. It establishes the baseline values for the assets with which you’re working by defining:

  • Description of the property
  • Physical condition of the property
  • Terms of any agreement or understanding which restricts the donee's use or disposal of the property
  • Appraised fair market value of the property on the date (or expected date) of contribution
  • Method of valuation used to determine the fair market value
  • Specific basis for the valuation, such as comparable sales
  • Description of the fee arrangement between the donor and appraiser

Knowing the values can help your tax and legal teams set up the right strategies in the event that any or all of the tax reforms outlined in Biden’s Green Book come to pass.

Next Steps

The appraisal is also a significant piece of information that substantiates your tax return, and as such, it faces significant scrutiny from the IRS and other regulators. It is critical that your estate has an appraisal that is reliable and accurate to avoid additional inquiry. In the next part of our series on why appraisals are playing such as a significant role in estate planning in 2021, we will take a closer look at some of the common issues with appraisals and how your estate and/or trust can mitigate those risks.

For more information about the role of valuation in estate planning, please contact John Rimar or another member of our team.

Copyright © 2021, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

The Important Role Appraisals Play in Trust and Estate Matters During Uncertain Times tax changes from the Biden administration may make estate appraisals more important in 2021.2021-07-30T17:00:00-05:00

Proposed tax changes from the Biden administration may make estate appraisals more important in 2021.

Planning & Tax MinimizationPrivate Client ServicesValuationYes