Now that the presidential election is over, and with the Senate divided 50-50, many are wondering what effect the new balance of power may have on estate taxes, and what to do about it.
In 2017, Congress passed the Tax Cuts and Jobs Act, which increased the federal estate, gift, and generation-skipping transfer (GST) tax exemption to $11,700,000. That increase is scheduled to “sunset” on December 31, 2025, which would reduce the exemption to $5,000,000 per person.
However, under some of President Biden’s proposals made during the campaign, reductions in the estate and gift tax exemption would occur sooner than the scheduled 2025 sunset, and may include more than just reductions in the estate and gift tax exemptions. Specifically, some of those proposals relative to estate and gift taxes include the following:
- A reduction in the estate and gift tax exemption to reflect “historic norms.” President Biden’s proposals included reducing the exemption to $5,000,000 per person ($10,000,000 for a married couple) or to $3,500,000 per person, the levels in place before the Tax Cuts and Jobs Act.
- Elimination of the “stepped-up basis” provision for estates. Currently, the cost basis of assets is “stepped-up” to fair market value as of the owner’s date of death, resetting the tax basis to fair market value, and eliminating capital gains tax on the unrealized appreciation. Under one Biden proposal, this provision would be eliminated, and unrealized capital gains would be taxed upon death at the new increased rates.
- Increasing top rates. President Biden’s proposals included increasing the top estate tax rate to 45%, and increasing the tax on long-term capital gains and qualified dividends to 39.6% for investors with income over $1,000,000, which is nearly double today’s top rate of 20%.
The final tax numbers may change, but there is no change to the value of sound planning. Clearly, knee-jerk reactions and panicked responses are not effective planning techniques. If you ever considered making lifetime gifts as part of your estate plan, now may be a good time to consider taking action. There are many advantages to funding a trust for your children or grandchildren. As always, you should discuss your estate planning questions and concerns with an experienced advisor before taking any action.
For more information, please contact a member of Prince Lobel’s Estate Planning, Probate Disputes, and Fiduciary Services practice group.