By Lindsay Taylor, Moneta Senior Advisor
With the transfer of power complete, many individuals have begun to worry about the estate tax implications of a Democratic majority-led government. While this provides a great opportunity to revisit your overall estate plan to ensure it is properly drafted to provide flexibility in today’s ever-changing tax environment, you shouldn’t panic.
Quick History of the Transfer Tax Laws
Prior to 1976, there were two separate taxes applicable to estates: the estate tax (based on assets transferred after death) and the gift tax (based on assets transferred during life) – each with their own, separate exemption amount. In 1976, those amounts were unified and a tax for generation-skipping transfers was added. In 2013, President Obama signed the American Taxpayer Relief Act, which planned to make permanent changes to the laws governing federal estate taxes, gift taxes and generation-skipping transfer taxes. Specifically, this law had three significant changes: (1) It set the exemption amount at $5,000,000 (in 2010 dollars), indexed for inflation; (2) It increased the estate tax rate to 40%; and (3) It provided for the portability of a decedent’s unused estate tax exemption to a surviving spouse.
In December 2017, President Trump signed the Tax Cuts and Jobs Act, doubling the $5,000,000 exemption to $10,000,000 (in 2010 dollars), making the exemption $11,180,000 in 2018 (now $11,700,000 in 2021) while maintaining the tax rate and portability discussed above. However, instead of permanent tax reform, the TCJA is set to expire after 2025 and the exemption amount would then revert to its pre-2018 level.
Biden’s Campaign Proposals
- Reduced Estate Tax Exemption: While current law provides for an estate tax exemption of $11,700,000 per person ($23,400,000 per married couple), Biden’s proposal would reduce the exemption to $3,500,000 per person. Additionally, there have been discussions on, again, making the gift tax exemption $1,000,000 per person and, therefore, not tied to the estate tax exemption. Finally, there is a possibility that the annual exclusion gift limit (currently $15,000 per beneficiary) could be reduced.
- Increased Tax Rates: As highlighted above, the current tax rate for transfers more than the decedent’s estate, gift or GST exemption is 40%. Biden’s proposal would increase that rate to 45%.
- No Step-Up in Basis at Death: Perhaps the most impactful proposal – as it would affect almost every American, regardless of estate value – is the elimination of the step-up in basis at death. Currently, most assets that are in a decedent’s estate at death receive a step-up in basis, meaning that the cost basis of assets are valued as of the decedent’s date of death and, if sold by the beneficiary, the gain from that sale is only based on the difference between the date of death value and the sale date. If this step-up is eliminated, then the decedent’s basis in the property would be carried over to the beneficiary, drastically increasing the capital gains tax paid when sold.
While Biden’s proposals may seem detrimental to high-net-worth families, most commentators believe that the reduction in the estate tax exemption and the elimination of the step-up in basis is likely an either/or scenario. Additionally, it’s important to remember that never in history has the estate tax exemption been decreased. Finally, with the slimmest of majorities in the Senate and several moderates on both sides, whether such sweeping legislation has the support needed to pass is yet to be known.
For those with taxable estates, there is much unknown about the future of transfer tax laws. Will Congress allow the tax reform related to transfer taxes passed under the TJCA to expire after 2025? Will Congress act before then to implement some (or all) of Biden’s proposals? If so, which of those proposals will pass?
Ultimately, it is important to consistently review your estate plan with your financial advisor and estate planning attorney to ensure that you are prepared for this unknown and that your documents are drafted to provide flexibility for the ever-changing environment.
© 2021 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.