RED ALERT – Biden’s Tax Plan Means Big Changes to Estate and Gift Planning!!

The recent changing of the political guard in Washington could usher in significant updates to federal estate tax law and other important tax statutes that could have an enormous impact on estate planning and gifting.

A number of tax policy proposals were floated during the campaign season and much speculation remains as to what changes we can expect to see in 2021 and beyond.

The potential legislative proposals that we are keeping a particularly close eye on are:

A Reduction in the Federal Estate and Gift Tax Lifetime Exemption:

The current exemption is at a historically high $11.7 million per individual, $23.4 million per married couple for 2021.  The current exemption is scheduled to sunset at the end of 2025, at which point it will fall back to the 2017 level of $5 million, adjusted for inflation.

The Biden team has proposed reducing the federal estate tax exemption to the 2009 level of $3.5 million and decoupling the lifetime gift tax exemption so that it can be reduced even further, to $1 million per person.  The current federal estate and gift tax rate is 40%, so the proposed reduction could mean a massive federal estate and gift tax liability for families who were previously unaffected.   

Elimination of the Step-up in Basis for Inherited Assets:

Currently, when a beneficiary inherits an asset from a decedent, the beneficiary receives a “step up in basis” to the fair market value of the asset at the time of the decedent’s death.   Therefore, the basis of the inherited property is no longer what the decedent initially paid for the asset.  The stepped-up basis substantially reduces the capital gains tax due on inherited assets. 

The Biden Administration’s tax proposal seeks to eliminate this step-up in basis and would cause beneficiaries to assume the carry over basis of the decedent, thereby significantly increasing the capital gains tax upon the sale of inherited assets.  The elimination of the step-up in basis could result in an additional 20% or greater tax liability on the appreciated portion of inherited assets, including, but not limited to, stocks, bonds, and real estate.   

Retroactive Application

Unfortunately, there is legal precedent to support the retroactive application of tax legislation. (See United States v. Carlton - 512 U.S. 26, 114 S. Ct. 2018) In other words, it is possible that changes in the tax law passed later this year could be retroactive to January 1, 2021.

There is no definitive guidance as of yet as to whether the new Administration and Congress will seek to retroactively apply the new tax law.  This determination will greatly impact all of our clients’ planning approaches and we are monitoring this issue closely. 

Planning Strategies

While the proposed changes may seem dire, there are planning opportunities available to combat these potential tax law changes.  But time is of the essence! 

If you feel that your estate could be impacted by these law changes, you should discuss your options with one of our experienced estate planning attorneys.  We know that some of these proposed law changes could result in millions of dollars of additional tax for the estates of some of our clients and readers.

Although the thought of this increased tax burden can be stressful, it is our job to find solutions and provide you with ways to incorporate those solutions into your planning.  We do not want you or your families to have to pay any more tax than is necessary.   

Call us today at 610-933-8069 to make an appointment for an in-depth review of your current estate plan and how it may be impacted by the upcoming changes.  While some uncertainty remains about the timing and final scope of the Biden team’s proposed changes, you should act now to proactively protect yourself, your wealth, and your heirs.  The UTBF Trusts, Estates, and Wealth Preservation team can help ensure that you achieve the most significant estate and gift tax savings possible through a custom-tailored approach designed specifically for your unique circumstances.    

David M. Frees, III
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Attorney, Speaker and Author
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