Earlier this month, the Electoral College voted and Joe Biden is now the President-elect.
One thing we know for sure is that the 2020 election and its aftermath pretty much so guarantees substantial changes in the tax law. Though it is still unknown, we can glean significant details from the Biden-campaign rhetoric to help us prepare for the future.
Here is what we know to date about Biden’s proposals that impact estate planning:
Estate, Gift, and Generation-Skipping Transfer Tax
The 2020 estate and gift tax exemption are $11.58 million (per taxpayer), with asset values in excess of that amount taxed at 40% before passing to your heirs. This exemption amount is slated to be reduced the end of 2025 to $5 million (per taxpayer). This is what we know under present law.
During Biden’s campaign, he embraced legislation that would reduce both the estate and GST tax exemptions to $3.5 million (per taxpayer) and lower the lifetime gift tax exemption to $1 million (per taxpayer).
He has also discussed additional proposed legislation that intends to restrict annual and aggregate donor limits on gifts to certain irrevocable trusts and family limited partnerships. That would put a dent in our advanced planning tools without a doubt, so time is of the essence.
Get your advanced planning completed now and ensure your planning grandfathered in before the changes come.
Moreover, numerous Democratic tax reform proposals suggest returning estate tax rates to historical norms. What does that mean exactly? Well, back in the 1940s, the top estate tax rate was 77%, and under 2001 federal tax law, the rates were as high as 45-55%.
We are expecting to see an upward adjustment in the estate and gift tax rates. The good news is that our clients who have committed to advanced planning before these changes occur will be safe.
Remember, paying the estate tax is a choice as it’s easily planned around if you’re committed to advanced planning!
Capital Gains Taxes
Current law taxes capital gains at regular income tax rates when those gains are realized on property held for less than one year. For long-term capital gains (which are gains on property held more than a year), there is a graduated tax rate contingent upon the taxpayer’s income level (0%, 15%, or 20%).
For individuals and couples who earn more than $200,000 and $250,000 per year respectively in net investment income, there is an additional 3.8% surtax added to their capital gains tax rate.
Current tax law also permits for a step-up in basis of appreciated property at the death of a property owner. This allows heirs who inherit property to sell the property shortly after the owner’s death with little or no capital gains tax on the sale of the inherited property.
Present law also allows for like-kind exchanges on appreciated property such as real property and artwork. This allows taxpayers to reinvest the gains on appreciated property into similar types of property without incurring capital gains tax when the property is sold.
If the taxpayer keeps making such like-kind exchanges on appreciated property until their death, the capital gains built up in that property will be eliminated by the step-up in basis rules.
Under a Biden presidency the step-up in basis rules would either be eliminated or impose recognition of gain on property at each taxpayer’s death. Furthermore, the Biden tax proposal eliminates like-kind exchanges and imposes a 39.6% long-term capital gains tax rate for individuals earning more than $1 million a year. With the addition of the 3.8% surtax on net investment income, the effective federal tax rate on long-term capital gains would exceed 43% for high earners.
This means many taxpayer’s estates could see significant increased capital gains tax bills upon death.
What to do Now
You can still take some concrete steps to prepare while you wait for the upcoming changes. There are solid advanced estate planning strategies that can help preserve a family legacy and protect the next generation from estate tax.
Moreover, you can protect your children from their future decisions while disinheriting the IRS.
While taxes are certainly important, they should not overshadow the need to get your personal affairs in order in case of disability or death. Remember, none of us gets out of here alive. Consequently, having your personal and spiritual affairs in order are priceless.
If you have not started planning or it has been 3 years of more since you had your estate plan reviewed, now is the time to get it done.
Randall Borkus is the president of Borkus Law Group, a law firm that specializes in tax law, estate planning and business and personal succession planning, with offices in Oak Brook, Illinois and Williston.