Although predicting changes to the tax laws is a difficult game, the election of President Biden and Democratic control of the House and Senate have made it more likely that President Biden’s tax proposals may become law. Here are a few that may impact the world of estate planning:
● The federal estate tax exemption, which is the amount you can leave to your heirs free of federal estate tax, is currently at $11.7 million per person. President Biden proposes to decrease the exemption to $3.5 million per person. Keep in mind that the law that gave us this high federal estate tax exemption amount was enacted in 2017, and the exemption amount will automatically
revert to 2017 levels ($5.49 million per person, adjusted for inflation) in 2025 unless Congress acts to extend the current law (and the higher exemption amount) and unless it is changed by Congress before that time.
● The lifetime gift exemption, the amount you can give away without paying gift tax during your lifetime, would decrease to $1 million, from its current level of $11.7 million.
● The federal estate and gift tax rate of 40% for assets/gifts over the exemption amount could increase to 45%.
● Currently, when a person dies, the deceased’s assets are valued as of the date of death. If stock, real estate, or other appreciated assets are worth more at death than they were at the time of purchase, any unrealized capital gains are wiped out, and the basis in the inherited asset for capital gains tax purposes changes at death so that it is equal to the value at the date of death, without any capital gains tax being paid. This is the so-called step-up in basis rule. President Biden’s proposal would eliminate the step-up in basis at death and treat death as triggering capital gains tax on all of that unrealized gain at the long-term capital gains tax rate.
It appears that these changes will not come in the near term, as the administration may wait for the economy to improve before moving these proposals forward. It is also unclear if these proposals would pass even a Democratic-controlled Congress.
We will keep our eye on these proposals and keep you posted on whether there is any movement or change in what is proposed, and whether any of them ultimately become law, in what form, and when the change will take effect.