Biden estate tax changes could hurt you

Biden estate tax changes could hurt you

Over the past 20 years there have been dramatic changes to estate tax laws. Currently, anyone can give away up to $11.7 million without being subject to federal inheritance tax. Estate tax reform is a now a distinct possibility because Democrats now control Congress and the White House. Tax rates could be changed under a Biden administration, but not without significant changes to the tax code and the law itself.

Current estate tax law

In 2001, the amount that a person could donate or transfer and be subject to estate tax was $675,000. The top tax rate was 55 percent. In 2010, the estate tax allowance or exclusion amount was dramatically increased to $5 million per person and was tied to inflation. The estate tax rate was decreased to 45 percent. Since then, the rate has been at 40 percent.

The Tax Cut and Job Creation Act went into effect in 2010, bringing the tax-free allowance to $5 million per person, though the law was previously amended. Under the law, the tax exemption was doubled to 10 million in 2015, and by 2021, we will have a tax exemption of $11.7 million. The law is due to sunset in 2026, at which time the exemption amount will decrease back to 5 million, unless Congress changes the law before then. California has no state estate tax of its own.

Another important aspect of estate tax planning is basis adjustment. “Basis” can be thought of as the cost of the asset when purchased, with certain deductions. Capital gains tax is calculated on the difference between the tax basis of an asset when purchased and the sales price of an asset when sold.  When certain assets are added to the deceased’s estate, these assets are given a new tax base corresponding to the fair market value of the property on the decedent’s date of death. This “basis adjustment rule” prevents those inheriting property from having to pay a potentially law amount of capital gains tax. At present, pension accounts and retirement funds are exempt from this rule.

For example, suppose that Robert Jones paid $50 per share for 1,000 shares of Google stock, or $50,000. John died ten years later. At the time of his death, the stock was worth a total of $130,000, and beneficiaries of Robert’s estate sold the stock. If Robert had sold those shares the day before he died, he would have had to pay capital gains tax on the $80,000 in appreciation of the Google stock ($130,000 minus $50,000). However, because of the increase in basis on the date of his death, if his beneficiaries sell the shares the day after Robert died, they would pay no capital gains tax. 

Biden administration proposed changes

The Biden campaign proposed lowering the estate tax exemption to $3.5 million per person and raising the top tax rate to 45 percent. They have also proposed to abolish the basic adjustment for assets upon death. It is unclear whether Biden’s plan would result in capital gains tax being paid at the time of death.

Estate Tax planning opportunities

One of the easiest ways to plan for estate tax is to make gifts. First, the annual gift-tax exemption allows anyone to give up to $15,000 a year to another person. Second, a person can create a 529 plan for a loved one using gifts.

Under these rules, a single person could fund a $75,000 college account for their children without using any of the estate tax exclusion amount, and a married couple could fund an account to $150,000.

Secondly, a person may also pay certain school or medical expenses directly to a third party. For example, parents can pay a child’s tuition directly to the college and give the child an annual gift of up to $15,000 in the same year.

These simple gift techniques can reduce the size of a person’s estate, thereby reducing the future burden of estate tax.

What you can do about estate taxes

Given that the tax exemption expires at $5 million in 2026, and that the Biden administration could seek to reduce it sooner and to a lesser extent, there are situations in which the exclusion amount should be used or could be lost.

Since the estate tax allowance doubles in 2017, estate planners have advised wealthy individuals against making large taxable gifts to take advantage of the tax-free allowance. The IRS has confirmed that if a person made a large gift and the allowance was reduced, the gift would be grandfathered in and no taxes would be due. This technique is a fantastic way to make a taxable gift in your child’s first years of life without the need for a gift tax exemption.

The Estate Tax Act seems unlikely to pass this year. Individuals still have time to make large gifts before the end of 2021, and they should review their current estate plans and consult with their advisers to take steps to reduce or eliminate inheritance and tax risks. Other options for inheritance and tax planning include a variety of tax-free options available to individuals, including a tax plan for the first three years of life, a gift of up to $5 million, or $100,000 for each child in the first year of life.

We can help

If you have any questions about estate taxes or estate planning, please contact us. We cover the full range of estate tax and estate planning services.



Estate Planning during the Biden Administration

Estate Planning during the Biden Administration

After several days of counting ballots, Joe Biden has been declared the winner of the 2020 Presidential election by many major news outlets.

Although we await the official certification of the election by each state, an official concession by President Trump, and the outcome of several pending lawsuits–which could take us into December or even January–the 2020 election and its aftermath promise significant changes in how Americans will be taxed.

While it is unlikely that every proposal discussed during President-Elect Biden’s campaign will become the law of the land, we can still glean essential details from all the campaign rhetoric to help us prepare to weather these possible changes.

Proposed Policy Adjustments under a Biden Presidency

Here is what we know so far about some of President-Elect Biden’s key proposals that are most relevant to your estate planning:

Estate, Gift, and Generation-Skipping Transfer (GST) Taxes

For 2020, the estate and gift tax exemption is set at $11.58 million (indexed for inflation), with any wealth over that amount taxed at 40 percent as it passes to heirs. This exemption amount is scheduled to be lowered in 2025 to $5 million (also indexed for inflation) unless new legislation is passed before then.

President-Elect Biden suggested during his campaign that he would support legislation that would reduce both the estate and GST tax exemptions to $3.5 million per individual and would lower the lifetime gift tax exemption to $1 million.

President-Elect Biden has discussed other proposed legislation, favorably proposed by Senator Bernie Sanders, that aims to place annual, aggregate donor limits on gifts to certain types of entities such as irrevocable life insurance trusts and certain pass-through entities such as family limited partnerships.

In addition to reduced transfer tax exemption amounts, several Democratic tax reform proposals have suggested returning estate tax rates to historical norms. What does that mean? In the 1940s, the top estate tax rate was 77 percent, and under 2001 federal tax law, it was as high as 45-55 percent. As a result, we may well see an upward adjustment in the estate and gift tax rates.

Capital Gains Taxes

Our current law taxes capital gains as regular income if those gains are realized on property held for less than one year. For long-term capital gains (gains on property held for a year or longer), there is a graduated tax rate depending upon the tax filer’s income level (0 percent, 15 percent, or 20 percent). For individuals and couples who earn more than $200,000 and $250,000 per year respectively in net investment income, there is an additional 3.8 percent surtax added to their capital gains tax rate.

The current law also allows for a step-up in basis of appreciated property if the property is held until the owner dies. This allows for inherited property to be sold or liquidated shortly after the owner’s death with little to no capital gains taxes assessed on the sale of the property.

Today’s law also allows for like-kind exchanges on appreciated property such as artwork and rental properties. This allows people to reinvest the gains that they earn on appreciated property into similar types of property without ever having to pay capital gains taxes when the property is sold. If the individual keeps making such like-kind exchanges on appreciated property until the individual’s death, the capital gains built up in that property will be erased by the basis step-up rules.

Proposed changes under a Biden presidency would either (1) eliminate the step-up basis rule for inherited property and impose a carryover basis rule for inherited property or (2) impose recognition of gain on property at the owner’s death. Additionally, the Biden tax plan proposes eliminating like-kind exchanges and imposing a 39.6 percent long-term capital gains tax rate on individuals earning more than $1 million per year. And if the 3.8 percent surtax on net investment income remains in place, the effective federal tax rate on long-term capital gains could exceed 43 percent.

If these changes are implemented along with the changes to the estate tax laws discussed above, many estates could see significant tax bills at the death of the estate owner.

What to Do in the Meantime

Although it may be too early to know exactly what the tax laws will look like in 2021, we can still take some concrete steps to prepare while we wait for answers. Tax issues, while certainly important, should not overshadow the need to get your affairs in order in case of an untimely death or disability. If it has been some time since you reviewed your estate planning documents such as wills, trusts, powers of attorney, and healthcare directives, now is a great time to do so. Reviewing these important aspects of your estate plan can go a long way toward creating peace and security for you and your loved ones in these uncertain times.

We Are Here to Help

No one knows for sure what the future holds for our country. However, what is certain is that we will continue to monitor the latest tax law developments closely and keep you updated as they unfold.

As always, we are here to guide you through the decisions of estate planning. Please reach out to us by phone at (530) 231-5161 or by email to

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Davis, CA 95616

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