Did you know that President Biden campaigned on a promise to lower the estate tax exemption limit, and to consider abolishing the step-up in basis for capital gains tax? While it can be difficult to predict when these matters will be addressed by the Biden administration, they will probably wait until after plans for managing the coronavirus pandemic and vaccine rollout, and stabilizing the economy and job recovery, have happened. That leaves a small window to consider how these proposed changes may impact your estate plan, and to prepare any necessary changes.
President Biden’s campaign platform included eliminating the step-up in cost basis for capital gains tax. Presently, when a beneficiary inherits property, the tax basis for that property is stepped-up to the fair market value at the time of the decedent’s death. This means a home that was originally purchased for $80,000, but sold for $880,000, will pay capital gains tax on the increase in value, which is $800,000. If the home is transferred through a will or trust and was worth $700,000 on the date of death, however, then the capital gains tax upon its sale will apply only to the gain from the date of death to the sale, or $180,000.
If this becomes law, it may be possible to use more sophisticated planning tools, like trusts, to avoid significant capital gains taxes. This tax is likely to have a broader impact on moderate-wealth families, so it is important to talk to an estate planning attorney about implications of capital gains taxes on your familial wealth as part of your comprehensive estate plan.
President Biden also made a significant proposal regarding gift and estate tax reform. The Tax Cuts and Jobs Act passed in 2017 raised the Gift and Estate Tax exemption limit from $5.49 million per individual, or $10.98 million per married couple, to $11.7 million for individuals, or $23.4 million for married couples. This increase is set to expire in 2025, if no other laws are passed. President Biden’s campaign platform, however, included a proposal to decrease this exemption to $3.5 million per individual, or $7 million for married couples. This means that individual estates between $3.5 million and $11.7 million, or $7 million to $23.4 million for married couples, may be subject to estate taxes, should his proposal become law. He also proposed an increased tax to those estates in the top bracket from 40% to 45%.
One common tax-saving strategy may be to make gifts to relatives under the exclusion amount prior to death in order to reduce the size of the estate. While decreases in the exclusion amount have not been applied retroactively, historically there can be no way to predict for certain whether gifts made during the first part of 2021 will be subjected to a decrease retroactively. Hence, it is important to work with a knowledgeable estate planning attorney to craft a comprehensive estate plan.
For more assistance with estate planning and related matters, please feel free to reach out to our office to schedule a meeting.