While dealing with variants and so much other strife in the world, even the quote “nothing is certain except death and taxes” is not fully correct, as we await a tax reform in the U.S. It is certain of course, that there will be taxes, but which and how to plan for them remains unknown at this time. As a result, many clients are unsure how to plan for the expected changes in the U.S. Federal estate tax and the U.S. Federal capital gains tax. How can this affect your net worth?
If you are a U.S. citizen or green card holder owning assets in the U.S., (assets include any form of investment – securities, real estate or anything else, whether the asset earns income or not) it is important to follow the anticipated legislative developments in the U.S. over the next few months. Why?
If your family’s net worth, whether you are single or married, is larger than US$6-7 million, it is prudent for you to consider U.S. estate tax planning. Always do so only with a qualified professional. If you are a global family, I cannot stress this last point enough – seek out the guidance of a qualified professional before deciding on an estate plan to implement. Note that if you are not officially married, the U.S. Federal government considers you single for most tax purposes. Community property laws can change this, even regarding estate tax, so check with your professionals.
Consider U.S. estate tax planning because though the current exemption from U.S. Federal estate tax is high (US$11.7 million in 2021), it is scheduled to go back down to around US$6-7 million (adjustments for cost of living increases) at the end of 2025, which is not too far off. Though most U.S. legislative proposals so far this year do not mention lowering the estate tax exemption any further, it will at least be reduced as stated if no further legislation is passed.
The U.S. Federal estate tax is essentially a double tax, because it is paid on the entire value of your asset, rather than on the gain, and income tax is paid on gains and income earned. The current rates of the Federal estate tax are 18%-40% of the value of your estate (family net worth on date of death) above the exemption amount. The anticipated tax reform may increase the maximum rate.
In addition, many of the U.S. legislative proposals offered this year will eliminate the benefits of several of the planning techniques currently used by practitioners to reduce exposure to the estate tax. Therefore, many practitioners are advising clients to wait. Others are implementing planning, as each day of this year passes and it appears that new legislation might not pass in 2021.
One issue which is important for Israeli residents to monitor is possible changes to when a U.S. citizen will be required to pay capital gains tax in the U.S. These clients will need to synchronize the tax years between the U.S. and Israel, to pay it in the same tax year or obtain other decisions from the relevant taxing authority. Your Israeli and U.S. tax professionals will need to work together.
In conclusion, stay aware of the developments, make sure your professionals are remaining updated and as always with estate planning for global families, make sure you have a team, comprised of U.S. and other tax professionals based on where you reside and any other citizenships you may have, or countries in which you invest or where potential heirs reside. You may wish to consider and implement some estate and capital gains tax planning now, before any of the tax reform is passed. Consult your team.