Preparing Your Post-Pandemic Financial Playbook

3 years ago

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Many, if not all, of us were surprised by the dramatic impact of COVID-19 on our everyday lives. The impact was felt across the social and economic spectrum and spurred some unprecedented governmental aid and spending. This aid came in the form of stimulus packages for individuals and small businesses that could amplify the country’s deficit and need to be addressed in the very near future. 

Here are some tips for developing a post-pandemic financial playbook in light of looming tax legislation.

1.Review Your Basis in Appreciated Capital Assets

If you own real estate, stocks, or other capital assets, you should review your current basis in these assets because current legislative proposals include substantial hikes in capital gains tax rates, including treating long term capital gains at ordinary income tax rates for those earning more than $400,000 per year.  The considerable tax hike may lead some investors to sell highly appreciated capital assets in 2021 prior to potential tax law changes.  It may also lead some investors with traditional IRAs to convert their IRAs to Roth IRAs and pay the taxes now under a historically favorable tax environment as opposed to deferring the taxes to a future date.  

2. Review Your Real Estate Holdings

If you own real estate investments, you should review your short- and long-term horizon for these investments because current legislative proposals include the elimination of the “1031 exchange”.  A 1031 exchange is a tax planning vehicle that allows a real estate investor to defer capital gains taxes on the sale of real estate provided the investor reinvests the proceeds of the sale into another real estate investment in accordance with the specific rules set forth under Section 1031 of the Internal Revenue Code.  The loss of this tax deferral vehicle could have a significant impact on an investor’s liquidity and return on these investments.  It could also lead to many real estate investors holding their real estate for longer periods and reducing the available supply of real estate for sale.

3. Review Your Estate Plan

The area that we think will likely see the biggest overhaul are laws impacting estate and gift taxes. The following are some of the major changes that have been proposed:

  • Reducing the current unified estate and gift tax exemption amount from $11.7 million per person to $3-3.5 million per person. This would dramatically increase the number of individuals whose estates would be subject to substantial taxes upon their death.
  • Increasing the highest estate and gift tax rate to 45%. 
  • Eliminating the step-up in basis at death. The Internal Revenue Code currently provides that whenever someone receives an asset at the death of another, the recipient gets a step-up in basis to the market value of the asset on the date of the transferring party’s death. It can eliminate entirely or markedly reduce the capital gains taxes paid by the recipient upon the sale of the inherited asset. Without the valuable step-up in basis at death, individuals may look to sell or donate highly appreciated capital assets during life. If not, the beneficiary will likely face a large tax bill upon the sale of the asset.
  • Eliminating or reducing the valuable discounts for transfers of interests in entities, like family limited partnerships, that are not conducting an active trade or business. Currently, individuals can form certain entities for family wealth transfers that allow the underlying taxable estate to be reduced as much as 20-40%.  If these discounts are eliminated, the number of taxable estates and the taxes on taxable estates would rise considerably.
  • Capping annual gifting at $20-30,000 per donor. Under current law, a donor can give up to $15,000 per recipient to as many recipients as the donor would like. The current proposals include implementing a cap on the donor.  This would eliminate another tax planning opportunity that is used to reduce the size of a taxable estate without the need to use an individual’s lifetime gift and estate tax exemption.

While we cannot predict the end of the pandemic, it appears that several tax law changes may be on the way soon because of it. It looks most likely that these changes will not take effect until 2022. Now is a good time to review your current assets and estate plan and consult with your advisors to ensure you take advantage of any tax and wealth preservation planning opportunities available now, before it is too late.


January 17, 2024

This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. This material may only be distributed in its original format and may not be altered or reproduced without the prior written consent of CabanaThe opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.  

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