Now that President Joseph R. Biden Jr. is in office, there could be major changes to the federal estate tax rules — so much so that wealthy individuals should take caution when considering estate plans.
During his presidential campaign, Biden was vocal about raising taxes for individuals earning $400,000 or higher. At the Democratic National Convention, he proclaimed, “it’s long past time the wealthiest people and the biggest corporations in this country paid their fair share.”
This includes a major reduction in federal estate and gift tax exemptions; assets such as real estate or stocks being taxed higher upon beneficiary’s sale; and an increased capital gains rate.
Congress has not yet passed any laws related to Biden’s tax plan. And even with Biden’s image of being “moderate Democrat” and having a lifelong track record of reaching across the aisle, it’s hard to tell whether his persona and approach will become a factor in compromising on some of these issues.
But anyone who is above the $400,000 earning mark would be wise to review Biden’s intentions, preferably with an estate planning attorney.
The limits for when estate tax (which is paid on the property or money of someone who died) and gift tax (which is paid on assets given by one living person to another) would kick in are lower with Biden’s tax plan.
Right now, any estate plan or gift plan that includes anything lower than the unified amount of $11.7 million from one individual (or $23.4 million for husband and wife, provided proper planning and execution) in estate assets would not be taxed.
The plan that Biden campaigned for, however, would cut the estate plan limit considerably to $3.5 million, or $7 million for husband and wife, which means that any estate plan that goes above those limits is subject to taxation. Even if Biden does not ultimately push for lowering the exemption to $3.5 million, he may still push for $5.5 million, a figure that is less than half the current exemption.
For the gift tax, the lifetime exemption for gifts would be lowered to $1 million — more than 90% of what it is now.
As for the tax rate on transfers over those amounts, they would be set at 45% — up from the 40% rate it stands currently.
When someone passes away, their assets — such as real estate or stocks, which may have been purchased at a much lower cost — are typically “stepped up” to the fair market value of the asset at the time of the decedent’s death. In other words, instead of using an asset’s value at the time of the decedent’s acquisition of the asset as its cost basis for income tax purposes, the date of death value is used as the asset’s basis.
There is a significant tax benefit to the party inheriting the asset. If the inheriting party later sells that asset, the income tax is then based on the difference between the sale price and the stepped-up basis on the asset, not the decedent’s lower basis.
But if Biden’s plan is adopted, that step-up in basis would be repealed. As such, the asset received by the beneficiary carries with it the original basis paid by the decedent. When the beneficiary then sells the asset, the beneficiary will incur much greater taxes on the sale of the asset.
As explained by personal finance website The Balance, the capital gains tax is what the government imposes on a profit made from selling real estate, stock investments, or other assets. (A capital gain happens when an asset’s total sale price is greater than its original cost.)
Right now, the capital gains tax rate stands at 20%, but it would nearly double to 39.6% for those individuals who earn more than $1 million annually.
As mentioned, there have been no laws passed for any or all of Biden’s plan. It’s too early to tell, then, whether these laws would take effect in 2022 and whether they would be retroactive to January 1, 2021.
But that doesn’t mean you should wait for advice on what you can do to prepare for these changes. Having a strategic plan — or multiple plans — in place beforehand can make things much easier and less stressful.
The Estate Planning attorneys at Chapman Law Group are here to provide the best advice for your situation when it comes to:
Contact us today so we may review your estate plan and determine what may be best for you, your assets, and your loved ones.
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