As President-elect Joe Biden moves forward with the transition and prepares for the inauguration next month, you may be wondering how the federal estate tax may be affected.
During the campaign, Biden pledged to roll back many of President Trump’s tax policies. In response to the Tax Cuts and Jobs Act (TCJA), Biden has promised a progressive approach to taxation, focused primarily on increasing the burden on high-income individuals and businesses.
Bear in mind that his odds of translating his proposals into legislation in the next couple of years largely hinges on the outcomes of runoff elections for the two Georgia seats in the U.S. Senate. Biden’s party needs to win both seats to take a majority in the Senate. These elections are scheduled for January 5, 2021.
Proposals for gift and estate taxes
The TCJA reduced estate taxes by cutting the top rate from 55% to 40% and temporarily doubling the federal gift and estate tax exemption to $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 imposing a top estate tax rate of 45%, from the current rate of 40%.
In addition, Biden would like to end the “step-up” in basis that spares beneficiaries substantial tax liability for capital gains on inherited assets that have appreciated in value, such as stock or a house. Specifically, if a beneficiary sells an inherited asset now, the capital gains tax is based on the asset’s fair market value at the time of the inheritance, rather than the date of the original purchase. However, if this “step up” in basis is eliminated under the Biden administration, the sale of an inherited asset by a beneficiary could result in significant capital gains.
Review your estate plan
As mentioned above, the ability of Biden to implement his proposals rests largely on the outcome of the Georgia runoff elections for Senate early next month. In the meantime, it would be worth your while to review your estate plan and make any necessary revisions. Potential tax law changes are a reason to trigger a review, as well as life changes, such as a marriage, the birth of a child or a divorce.
Please contact my office at firstname.lastname@example.org or 530-802-0640 for help reviewing your plan and making changes based on your specific circumstances.
Virginia Ryan provides business law and estate planning services to clients in Northern California, including Auburn, Grass Valley, Nevada City and Truckee.