PROPOSED ESTATE AND GIFT TAX LAW CHANGES – OCTOBER 2021
The Biden Administration has proposed sweeping estate tax impacts to the estate and gift structure. The proposed impact will effectively increase estate and gift tax liability significantly.
The Biden campaign is proposing to reduce the estate tax exemption to $3,500,000 per person ($7,000,000 per married couple). The current rate is an estate tax exemption of $11,700,000 per person ($23,400,00 per married couple). This is approximately a 70% reduction in the current estate tax exemption. While the reduction will not impact many people, it will impact enough. This means that the estate tax liability will no longer impact just the rich. This reduction begins to impact those in the middle class because a taxable estate does not include just money in the bank, other assets are included in an estate such as ownership of life insurance policies and small family run businesses, among other things.
Additionally, the Biden Administration wants to increase the top estate tax rate from 40% to 45%. This is approximately a 12% increase in the top estate tax rate. This means that assets over $3,500,000 could be taxed at 45% (whereas presently only single people over $11,700,000 will pay 40% assets over the exemption).
Further, the Biden campaign proposed to eliminate the “step-up basis adjustment” for assets transferred to beneficiaries and heirs. This means imposing a capital gains tax on assets passing to heirs and beneficiaries. It is not clear whether Biden’s plan would result in pre-death capital gains being realized at the time of a person’s death, which means the capital gains tax would be levied prior to inheritance. The alternative proposal is to carry the capital gains over to the heirs and beneficiaries. This means those who inherit the asset would pay both the pre-death and the post-death capital gains tax upon the sale of their inherited asset. Effectively this results in a double taxation of estate assets. This particular aspect of Biden’s proposed plan has been met with opposition in Congress. It remains to be seen whether this suggested tax will actually be enacted.
It is also important to note that while the current $11,700,000 is scheduled to sunset on January 1, 2026. However, the Biden plan includes a provision to accelerate this sunset to January 1, 2022. When the cost-of-living increases within current legislation are included, the exemption would drop to $6,020,000 per person for estates created in 2022. Accordingly, a married couple would need to have a net worth of slightly over $12 million before they are facing a Federal estate tax (as opposed the $23,400,000 today). Thereafter, the estate exemption drops again to $3,500.000.
There are estate planning strategies that can be taken before any tax law change occurs. But those strategies must be executed before the changes take effect which is potentially next year.