President Biden proposed several changes to current tax law during his campaign. This article will discuss some of those possible changes and how they could have big impacts on your estate planning.
Decrease in the Gift and Estate Tax Exemption
One proposal includes a decrease in the gift and estate tax exemption. The gift and estate tax exemption allows a certain amount of gifts during a person’s life and at their death to be made without imposing the gift and estate tax. Currently, any gift made over $15,000 during the year is taxable and reduces a person’s overall exemption.[1] However, the total amount that can be exempted in a lifetime is $11.7 million for individuals or $23.4 million for married couples.[2] The exemption was increased to this amount in 2017, but only for a limited period of time and is set to decrease back to $5.49 million for one person or $10.98 for married couples in 2026.[3] This total amount is reduced by any taxable gifts that have been made in previous years.
President Biden’s campaign proposed to reduce the gift and estate tax exemption back to $3.5 million per person or $7 million for married couples, which was the amount in previous years.[4] A decrease in this exemption can result in increased tax liability for those with large estates. This, in combination with a proposed tax rate increase to 45% can significantly affect any intended estate planning.[5]
Elimination of the Step-Up in Costs Basis Benefit
Another proposed change includes elimination of the step-up in costs basis benefit. This benefit limits capital gains taxes by not taxing the increase in value on certain asserts that are transferred at a person’s death. The “step-up in costs basis” for capital gains tax allows the inherited property to be valued at the fair market value time of the decedent’s death, rather than at the time that the decedent acquired the property.[6] Then if the beneficiary sells the property, the income tax is determined by the difference between the sale price and the value of the property at the decedent’s death (the “stepped-up” basis.)[7]
This “step-up” allows the beneficiary to avoid a large tax on assets that have grown in value. If this is eliminated, the beneficiary would be taxed on the same basis that the decedent was subject to at the time of their death (“carryover basis”).[8] As a result, a beneficiary would have to pay capital gains tax if and when they sold the assets.[9] The capital gains tax could also be increased to 39.6% which further increases the burden on the beneficiary if the assets grow in value.[10]
There are some creative solutions that can be adopted to avoid these ramifications such as selling assets and gifting cash or paying the income tax on the intended gift so that it is no longer treated as gift. An experienced estate planning attorney can help you make decisions as to whether you should take advantage of the current law by making a large gift this year or if it is beneficial in your circumstances to wait.
What Now?
Another outstanding possibility is that the changes can be made retroactive to January 2021, which would impact those who plan to make any large transfers in the coming year and requiring them to pay gift tax on transfers that occur.[11]
Recent legislation was introduced in March in the Senate that adopts the decrease in the gift and estate tax exemption by decreasing it to $3,500,000 per person and $7,000,000 for married couples.[12] As of right now, this current bill does not propose to eliminate the step-up basis. However, it is uncertain if the details of the bill will become law or if it will change substantially. Under the current language, the changed would not take effect until January 1, 2022.[13]
Due to these uncertainties, it is important that you examine your estate planning strategy to determine if you need to make any significant changes before the end of the year to devise a gifting and estate plan that best protects you and your family.
[1] https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes
[2] Gassman, Alan, “Senate Estate And Gift Tax Bill Will Reduce Exemption To $3,500,000 And Take Away Many Opportunities,” March 27, 2021 at https://www.forbes.com/sites/alangassman/2021/03/27/senate-estate-and-gift-tax-bill-will-reduce-exemption-to-3500000-and-take-away-many-opportunities/?sh=2c1efcf04712
[3] https://www.taxpolicycenter.org/briefing-book/how-did-tax-cuts-and-jobs-act-change-personal-taxes
[4] Sullivan, Paul, “The Estate Tax May Change Under Biden, Affecting Far More People,” January 15, 2021 athttps://www.nytimes.com/2021/01/15/your-money/estate-tax-biden.html
[5] Id.
[6] https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/property-basis-sale-of-home-etc/property-basis-sale-of-home-etc
[7] Id.
[8] Sullivan, Paul, “The Estate Tax May Change Under Biden, Affecting Far More People,” January 15, 2021 athttps://www.nytimes.com/2021/01/15/your-money/estate-tax-biden.html
[9] Id.
[10] Id.
[11] Sullivan, Paul, “The Estate Tax May Change Under Biden, Affecting Far More People,” January 15, 2021 athttps://www.nytimes.com/2021/01/15/your-money/estate-tax-biden.html
[12] Gassman, Alan, “Senate Estate And Gift Tax Bill Will Reduce Exemption To $3,500,000 And Take Away Many Opportunities,” March 27, 2021 at https://www.forbes.com/sites/alangassman/2021/03/27/senate-estate-and-gift-tax-bill-will-reduce-exemption-to-3500000-and-take-away-many-opportunities/?sh=2c1efcf04712
[13] Id.
