Were you aware that, before he was elected, President Biden campaigned on a promise to lower the estate tax exemption limit, and to consider abolishing the step-up in basis for capital gains tax? While it can be difficult to predict when these matters will be addressed by the Biden administration, they will probably wait until after plans for managing the coronavirus pandemic and vaccine rollout, and stabilizing the economy and job recovery, have happened. That leaves a small window to consider how these proposed changes may impact your estate plan, and to prepare any necessary changes.
First to consider may be the gift and estate tax reform proposal. The Tax Cuts and Jobs Act, passed in 2017, raised the gift and estate tax exemption limit from $5.49 million per individual, or $10.98 million per married couple, to $11.7 million for individuals, or $23.4 million for married couples. This increase is set to expire in 2025, if no other laws are passed. President Biden’s campaign platform, however, included a proposal to decrease this exemption to $3.5 million per individual, or $7 million for married couples, the level it was when President Obama took office. This means that individual estates between $3.5 million and $11.7 million, or $7 million to $23.4 million for married couples, will be subject to estate taxes, should his proposal become law. He also proposed an increased tax to those estates in the top bracket from 40% to 45%.
President Biden’s campaign platform also included eliminating the step-up in cost basis for capital gains tax. Presently, when a beneficiary inherits property, the tax basis for that property is stepped-up to the fair market value at the time of the decedent’s death. For example, Jane bought a house in 1952 for $80,000. If she sold the house in 2006 for $780,000, she would owe capital gains taxes on $700,000, $780,000 – $80,000 = $700,00. Instead, assume that Jane passed away in 2006 and left the home to her son, Mark. Mark sold the home two years later, just after the housing market crashed, for $500,000. With a step-up in basis, Mark does not owe any capital gains tax, because the home lost value from when he first acquired it, $500,000 – $780,000 = -$280,000. Without a step-up in basis, however, Mark would owe capital gains taxes on the amount over the price his mother originally paid, $500,000 – $80,000 = $420,000.
If this becomes law, it may be possible to use more sophisticated planning tools, like trusts, to avoid significant capital gains taxes. This tax is likely to have a broader impact on moderate-wealth families, so it can be important to talk to an estate planning attorney about implications of capital gains taxes on your familial wealth as part of your comprehensive estate plan.
To learn more about how to design a solid estate plan that best reflects the most current laws, our office is here for you. Please reach out to us today to schedule an appointment.