The Biden Administration’s tax proposals have been on the minds of many of our clients. You may be wondering if and how your estate plan will be impacted, and what you should do now to minimize your heirs’ tax liability.
The answer is, It is too early to tell. With Congress so divided, and various members now putting forth their own legislative agendas (for example, Senator Sanders’ For The 99.5% Act), it is impossible to predict what will end up enacted into law. It is important to be aware of ongoing developments, however. Helpfully, on May 28 the Treasury Department released its “Green Book,” a detailed summary of all the proposals that have been set forth. In this post, we focus on the two proposals that are most relevant to our clients’ estate plans: the step-up in basis, and the estate tax.
Proposal to eliminate the step-up in basis
Currently, anyone who inherits a highly appreciated asset pays capital gains taxes based on the asset’s “stepped-up” value – in other words, the value on the original owner’s date of death, NOT the value on the date it was purchased by the original owner. Moreover, tax is due only when the asset is sold by the individual who inherited it. Taking advantage of these two rules has been the building blocks of many people’s estate plans. Both of these rules would change under the Biden plan, as follows:
- The first $1 million in capital gains would be tax-free, indexed to inflation.
- For gains above $1 million, the step-up in basis would be eliminated. The $1 million exclusion from gain would be on a per person basis, and would be portable between spouses, just as the current estate tax exemption is.
There would be several exceptions to the two new rules, including:
- If the appreciated asset passed is a family-owned business or farm, no tax is due until the business is sold or otherwise ceases to be family owned and operated. Taxes on a family business could be paid off in fixed installments over 15-years.
- Tangible personal property would be exempted from capital gains tax.
- Taxes would not apply to gifts or bequests to charity.
For households with annual income below $1 million, the Biden plan leaves the long-term capital gains tax rate as is. For individuals with annual income above this level, or a married couple with income over $2.5 million, the rate would increase to 39.6%. But nothing is yet set in stone.
Estate tax exemption will probably be left as is
The current unified lifetime gift and estate tax exemption is $11.7 million per person, double that for a married couple. Although tax policy gurus anticipated the exemption would be reduced under the Biden plan, that now seems unlikely. But remember: the estate tax exemption is already slated to decrease in 2026. Under the 2017 Trump Tax plan, the estate tax exemption reverts to $5 million per person, indexed for inflation, beginning January 1, 2026.
As you can surmise from the above, the proposed tax changes are unlikely to affect most clients.
If on the other hand you have a taxable estate, you have probably already been planning for the 2026 sunset of the current estate tax exemption by giving away assets, taking advantage of the $15,000 annual gift tax exclusion, and donating highly appreciated assets to charity. Talk with your attorney about possibly escalating these steps to further reduce your taxable estate.
For most people, making any changes to their estate plan is premature. The best advice, for now, is to have a clear picture of your assets. Make sure you know what they are, what your cost basis is, and how they are owned. Then, depending on what laws are ultimately enacted, you will be ready to implement any recommended estate planning modifications.