Certain Biden-Harris proposals may, if enacted, have a significant effect on your estate plan. 2020 was a monumental year with many changes and 2021 may bring changes that affect your estate plan. There was a political shift in Washington, changes to the New York State Medicaid program, a world-wide pandemic, and amendments to state and local laws. So regardless of the policies and laws that have been proposed by President Biden and Vice President Harris, 2021 is a good time to review your estate plan with your attorney to ensure your planning is in line with the changes wrought by a tumultuous year.
As a presidential candidate, President-Elect Biden put forth two proposals that would most affect estate planning. Should Congress choose to advance these proposals, you should be in a position to understand how it may affect you and what the options are for action.
Proposal 1: Decreasing the Federal Gift and Estate Tax Exemption
One proposal is to decrease the Federal estate tax exemption from the current level. Under the Federal Tax Cuts and Jobs Act, the federal estate and gift tax exemption is $11.7 million. This means that there will be no Federal estate tax due if the assets left behind at death combined with the assets given away during life, are below that level. The Act, implemented in 2017, states that the exemption level will “sunset” in 2026, at which point the exemption will be $5 million, indexed for inflation (likely to be about $6 million).
As a candidate, President Biden proposed a reduction in this exemption to as low as $3.5 million. For many, a reduction in the exemption level will have no impact on their estate plan as their own assets fall below these levels. But for those with assets in excess of the new exemption, a change in their estate plan may be necessary to be most tax efficient. Married couples should be planning in a way that uses the estate tax exemptions for both spouses. Additionally, lifetime gifting and trust planning may be prudent to decrease the amount of one’s taxable estate – while the exemption remains at its current level.
Proposal 2: Elimination of Step-Up in Basis at Death – Capital Gains Tax
The second proposal that may alter estate planning techniques relates to capital gains tax. Capital gains tax is a type of income tax which is calculated when as asset is sold, based on any appreciation in value.
To illustrate: if a share of stock in a company is purchased at $10,000 and is subsequently sold years later for $100,000, there is a $900,000 gain which will be taxed as capital gains. The law has long been that the stock gets a “step-up” in basis to fair market value at the death of the original owner. If the owner dies and the date of death value of the company is $100,000, this will be the new basis by which capital gains is calculated. If a beneficiary subsequently sells the asset for $100,000 there is no capital gains tax due. If the beneficiary waits and in the interval the value increases to $120,000 – the beneficiary only pays capital gains tax on the $20,000 in gain.
This same set of laws governs the increase in property value for real property as well as other assets, including the primary residence. Some homeowners purchased their homes decades ago and the property has since increased greatly in value. In those situations, beneficiaries often rely on the step up in basis to the date of death to eliminate or reduce capital gains taxes upon the sale of the home.
The proposal from the candidate is to eliminate this step up at death. On those assets that have greatly increased in value, the beneficiaries of the estate would have a higher tax to pay upon the sale of the asset. If the step up in basis at date of death is eliminated, some individuals may sell these types of assets while they are alive or do other tax-related planning to minimize the impact.
Whether you are concerned about these particular tax changes or not, it is advisable to check in with your estate planning attorney, financial advisor, accountant and other advisors to review your estate plan in light of the many changes that have taken place on the State and Federal levels in the past twelve months.