With President-elect Biden preparing to take office, you likely have questions about how the changing balance of power will affect your federal estate taxes.
Biden has pledged to roll back many of President Trump’s tax policies after taking office, including provisions of the Tax Cuts and Jobs Act (TCJA). Biden has promised a progressive approach to taxation, which focuses on increasing the burden on high-income individuals and businesses.
Whether these changes come to pass, however, largely hinges on the outcomes of runoff elections for the two Georgia seats in the U.S. Senate, which are scheduled for January 5, 2021. Democrats need to win both seats to take a majority in the Senate.
The estate and gift tax exemption
The TCJA established the estate and gift tax exemption at the historically high level of $10 million (adjusted annually for inflation) through 2025. The 2020 exemption is $11.58 million for individuals and $23.16 million for married couples. For 2021, it’s $11.7 million and $23.4 million, respectively. These TCJA amounts are scheduled to expire after 2025 to $5 million for individuals and $10 million for married couples, adjusted annually for inflation.
Biden has proposed reducing the exemption to $3.5 million for estate taxes and exempting $1 million for the gift tax. He also favors a top estate tax rate of 45%, a significant increase from the current rate of 40%.
In addition, Biden has proposed ending the “step-up” in basis that allows beneficiaries to avoid substantial tax liability for capital gains on inherited assets that have appreciated in value. If a beneficiary sells an inherited asset now, the capital gains generated is the difference between the asset’s fair market value at the time of sale less the stepped-up basis, rather than the basis at the date of the original purchase. Eliminating basis step-up would significantly increase the taxes owed.
What to do now
Whether Biden is able to implement his proposals rests largely on the outcome of the Georgia runoff elections next month. In the meantime, review your estate plan and make any necessary revisions.
For help reviewing your plan and adjusting it based on your specific circumstances, contact your trusted advisors at Smolin Lupin.