With the election of President Biden, coupled with the Democrats taking control of the House and Senate, there may be changes to the federal estate and gift tax-related laws.  However, due to the debate over legislation related to Covid-19 stimulus plans, some think the complex estate tax law changes may not be considered until the fall of 2021.

Biden’s proposed changes to federal estate tax laws include:

  1. Reducing the estate tax exemption to $3.5 million;
  2. Increasing the federal estate tax rate to 45%;
  3. Eliminating the step-up in basis to the date of death fair market value of appreciated assets.

Current federal estate tax laws provide:

The federal gift and estate tax exemption provides a set value for lifetime gifts and transfers at death that may be made free of gift and estate tax. At the beginning of 2017, the exemption amount was $5.49 million per person, or $10.98 million for married couples who properly transferred the unused portion of the exemption to the surviving spouse. The Tax Cuts and Jobs Act of 2017 (“TCJA”) doubled those exemption amounts. Currently, for 2021 deaths, the exemption amount is $11.7 million per person, or $23.4 million for married couples. The TCJA adjusts the exemption amount for inflation each year until 2025, at which time the exemption will be reduced to the pre-TCJA amount of $5.49 million (as adjusted for inflation).

Biden proposes decreasing the exemption to $3.5 million per person or $7 million for married couples. It is not clear whether this proposal would apply retroactively to the beginning of 2021, which could impact transfers made in 2021 prior to any legislative action. To date, decreases in the exemption amount have not typically applied to transfers made prior to the passing of new legislation. Along with this decrease, Biden proposes an increased tax to those estates in the top tax bracket from 40 percent to 45 percent.

Currently, federal estate tax is imposed on the fair market value (FMV) of all assets valued at death. Beneficiaries have generally been willing to have assets valued with the date of death FMV because they receive a step-up in basis to the FMV, effectively eliminating capital gains liability at the time of a subsequent sale of the appreciated asset. Under the Biden proposal, it is unclear whether a capital gains tax will be imposed on death so that the beneficiaries will still inherit at FMV, or if there will be an estate tax imposed on the FMV so that beneficiaries will only receive a step up based on taxes, or, if the step-up will be limited to certain types of assets (similar to the 2010 policy).

The information provided here is of a general nature and is not intended to address the specific facts and circumstances of any individual. The reader should retain the services of a professional to address his/her specific situation. Tax information, if any, contained in this communication is not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  This article is not intended to be legal or tax advice, rather a general overview and exploration of speculative changes in estate planning-related laws.