Now that the dust has settled with the presidential election and runoffs relating to the control of the US Senate, there is a clear picture of who is in control in Washington. With the Senate divided 50/50, Vice President Kamala Harris holds a tie-breaking vote on any deadlocked legislation. Many experts are left wondering how President Biden will go about the procedure of attempting to enact the tax proposals from his campaign (the “Biden Plan”). There are many proposals in the Biden plan. This blog will focus on the tax laws that could be revised relating to someone’s death.
President Biden has expressed a desire to lower the federal estate and gift tax exemption amount either to $5 million per individual ($10 million per married couple) or $3.5 million per individual ($7 million per married couple). This is a large drop from the current exemption of $11.7 million per individual ($23.4 million per married couple). It should be noted that if nothing is done, the current estate and gift tax exemption will sunset in 2026 and return to the 2017 level of $5 million, as adjusted for inflation. In addition, he has expressed a desire to raise the top estate tax rate to 45%, up from the current top rate of 40%.
Assuming that some form of the decrease in the estate tax exemption is passed into law, the effective date is something that is still an unknown. Sometimes, tax legislation is made retroactive, meaning that if the law is passed in 2021, the law could potentially be effective as of January 1, 2021. Therefore, if an individual were to rush and maximize tax-free gifts in 2021, it is possible that the gifts that were made free of gift tax could be retroactively subject to a large amount of gift tax. There is some precedent that such a retroactive law could be legal and constitutional, however the precise issue has not been litigated. Many policy experts predict, however, that in the current political landscape the tax changes would not be retroactive but prospective, such as January 1, 2022, which would allow an opportunity to plan for the change in the law.
If changes to the estate tax are made, it will be important to review your estate plan with a qualified estate planning attorney. There may be options available to you to decease or eliminate any potential tax liability attributed to your estate.
Removal of Step-Up At Death
While estate taxes are at the top of most individuals’ minds when planning for the distribution of their estate, it is also important to consider the potential income tax changes that are proposed relating to the step-up in basis of assets at death. Currently, when an individual passes away, all of his assets receive a “step-up” in the basis of the assets to the value as of the individual’s date of death. This is can be an extremely advantageous policy to beneficiaries of an estate. If Dad bought a stock in the 1980s for $10 a share and sold the share 30 years later when it was trading at $400, he would have taxable long-term gains of $390 of per share. However, if Dad dies while still owning the stock when it is valued at $400, the beneficiaries of his estate will receive the stock with a basis of $400, a huge step-up from Dad’s $10 basis in the stock. If the beneficiaries choose to immediately sell the stock, there will be no capital gains due. If they hold the stock for future growth, they can rely on the $400 basis whenever they do decide to sell. This is an enormous benefit to the beneficiaries of estates relating to income taxes on appreciated assets and can also be crucial in the transfer of the family business to the next generation.
The Biden Plan seeks to put an end to the long-standing law of assets receiving a step-up in basis at the death of the owner of the asset. What is not clear is whether (i) the built-in gain attributed to the appreciated property would be due at the death of the owner, or (ii) the beneficiary would receive a carryover basis in the inherited property, meaning the beneficiary would receive the same basis as the original owner. It should be noted that there have been previous attempts to eliminate the step-up in basis which have failed.
While these indicate President Biden’s desires as expressed during his campaign, the unknowns lie in how he would attempt to enact his proposals. The US Senate requires 60 votes to avoid a filibuster, which can delay or block legislative action. We can be sure that President Biden will not be able to obtain 10 additional votes from across the aisle to avoid filibuster. However, President Biden could attempt to use “budget reconciliation” to pass his proposals, which has been used since the late 1990s to enact both revenue reducing legislation and revenue increasing legislation. With budget reconciliation, the Senate only needs 50 votes (plus the tie-breaking vote held by Vice President Harris) to enact legislation. This means President Biden would need the entire Democratic caucus to vote in favor of his proposals. Due to some more moderate/conservative leaning members of the Democratic caucus, this is by no means guaranteed. Sen. Joe Manchin (D-WV) has even voted in favor of repealing the estate tax in the past. Therefore, while we have stated the Biden Plan’s proposals above, the final changes to the estate tax and step-up in basis could look much different if passed into law.
Should you have any questions relating to potential estate taxes on your estate, please reach out to Timothy Doolittle with the Wladis Law Firm. We will be keeping a close eye on the laws that are passed in 2021 and beyond and help guide you through making important decisions relating to your estate plan.