Currently, there is a significant potential for tax reform to occur under President-elect Biden and the Congress he will be working with during the next four years. Some of his proposed changes could have a drastic impact on estate planning practices and policies that focus on wealth transfer planning. In this article, we review some of these potential revisions to current estate planning tools and give examples of how you might feel the impact.
In 2020, the lifetime federal estate tax exemption was set at $11,580,000, as was the federal gift tax exemption. This meant that married couples could gift a combined total of $23.16 million before any taxes would be due at a rate of somewhere between 18% to 40%. Under President-elect Joe Biden, promises to return these exemptions to mirror more historical norms have been echoed throughout his campaign.
This means a potential reduction of the current federal estate tax exemptions down to a more modest $3,500,000 during an individual’s lifetime. The gift tax exemption might be reduced significantly, paring it down to just $1,000,000 for an individual’s lifetime. Also, the tax rate could experience a hike of up to 45%. For some families, the most troubling aspect of Biden’s proposed changes to current estate and gifting exemptions would be that any remaining amounts not used at the end of the year may be lost while future gifts may get hit with a higher tax rate.
This scenario under the Biden administration would mean gifting your children a property worth more than $3,500,00 could subject them to a 45% tax bill on the remaining value after the initial $1,000,000 gift exemption.
Under current federal law, the base value of an inherited property receives a step-up to the fair market value at the time of the decedent’s death. This is to eliminate the capital gains liability from the property’s appreciated growth before their loved one’s passing.
While Biden has supported the idea of eliminating this practice, it is unknown if he wants to tax the unrealized appreciation on the date of death or do away with the step-up basis altogether. This could impact estate planning in one of two ways, depending on how the president-elect chooses to approach the issue.
If you had purchased company stock a few decades ago for $75,000, and when you die, the value of these shares had gone up to $1,000,000, your heirs wouldn’t owe anything under the current step-up basis policy unless they sold it for more than the fair market value at the time of your death.
Biden’s plan would require your heirs to pay tax on the difference between the amount you originally paid versus the fair market value on the date of your death. Or, he may opt to take a carryover basis approach where assets would get inherited at the original purchase price. This would mean they would owe tax on anything above that initial $75,000 you initially paid. Regardless of which direction Biden chooses, this could potentially create major tax headaches for bereaved families across the nation.
The current federal tax rate on long-term capital gains and other qualified dividends has a 20% maximum, but president-elect Biden has already proposed a significant increase. On income above $1,000,000, Biden would like to see a new top tax rate of 39.6% for these earnings. This would mean any capital gains or qualified dividends you exceed $1,000,000 in earnings would have an additional 19.6% in federal taxes due.
The implications of Joe Biden’s election as President of the United States carries significant implications that can affect estate planning and wealth distribution into the foreseeable future. If you or your family has not already created an estate planning strategy, you must do so now. It is possible to still take advantage of the current generous federal estate and gift tax exemption levels.
Make critical estate decisions with confidence and work with an experienced Florida estate planning & probate lawyer when preparing your loved one’s property and assets for the probate process. At The Legacy Law Firm, we work with you to protect the best interests of the decedent’s assets and beneficiaries. Call us today at (954) 999-9683 or contact us online to discuss your unique situation, learn more, and get started.
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