Although the terms are not ironed out, changes to our federal tax laws will be implemented in the next several months. Upon announcement, the details will likely spur significant, immediate changes to people’s estate plans, especially for people who own small businesses or farms. The immediateness of the desire to adapt to those tax law changes will be amplified if any tax increases are applied retroactively.
Due to the uncertainty of the details of the tax law changes, it is incredibly difficult to take steps right now to decrease our taxes under those new laws. Thus, in many instances, waiting is prudent right now. Nevertheless, there are a handful of actions that can be taken now to prepare in general for the tax law changes, regardless of their details.
First, determine where you stand. A personal/business balance sheet (nothing fancy or formal) listing all — literally all — of your assets by category and value and all liabilities in a similar format can give you an idea of where you are right now, so that you will be able to (quickly) know what to do when the details of the tax law changes are announced.
Second, consider investigating tax-exempt investments. For example, the interest earned on money that is loaned to many municipalities is not subject to taxation. Various government bonds and Roth IRAs that are tax-exempt will become more attractive investments when the tax rate increases. Of course, only “earned income” can be used to fund a Roth IRA, so those contemplating early retirement may need to factor in some ability to earn income in order to use certain tax-exempt investment tools.
Third, similarly, be ready to investigate tax-deferred investments such as traditional IRAs and many employer-sponsored retirement plans. When tax rates increase, deferring taxes to a time later in life when your income may be lower (even if the tax rates remain high at that time) can save money.
Fourth, for some people, the time may be right to “bite the bullet” to pay the taxes on certain assets/investments now, while tax rates are relatively low.
Otherwise stated, it might be the time to remove assets from corporations, incur the tax and plan to save/defer taxes going forward (often through adjusted bases on those assets in the future). If this is a reasonable consideration for you or your business, conversations with your key advisors concerning this should idea should be organized immediately to increase the likelihood of completion before year-end.
Fifth, if your net worth exceeds about $3 million, it might be time to consider making gifts, making charitable contributions or otherwise taking advantage of the (relatively) high ($11.5 million per person, per lifetime) gift/estate tax exemption amounts before those limits automatically decrease to about $6.5 million in 2026 and possibly down to $3 million even sooner under the tax law changes being currently considered. However, this type of gifting should always be coordinated with a professional’s advice so that future chances to save on gift/estate taxes are not forfeited.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.