Trusts & Estates Insider

Changes to the federal gift and estate tax exemption are certainly nothing new, particularly when there is new President in the White House. The Biden/Harris proposed tax plans contemplate dramatic changes to the estate and gift tax exemptions and capital gain treatments, which may influence estate planning decisions. Some of the proposed changes, which are addressed below, may be reason to re-evaluate your estate plan sooner rather than later.

Over the last 24 years, the total amount that a US taxpayer may transfer upon death to his/her selected beneficiaries without incurring federal estate tax has steadily increased from $600,000 in 1997 to $11.7 million dollars in 2021. The Tax Cuts and Jobs Act of 2017 (“TCJA”) multiplied the estate tax exemption (also known as the “unified credit”) two-fold. With double the credit available to married couples and factoring-in the many proven wealth transfer strategies currently available, these conditions may well present the friendliest wealth transfer environment since the modern estate tax first was implemented in 1916.

It is important to note that the ability to transfer significant assets upon death also inures to benefit the living. The lifetime gift exemption, which TCJA increased to equal the federal estate tax exemption, has created an estate planning boon for high-net-worth families over the last few years, seeking to move appreciating assets out of their estate to benefit their heirs. Sprinkle-in the friendly low interest rate environment (an integral part of many popular estate planning techniques), as well as comparatively low valuations of certain asset classes (such as certain operating businesses and most investment real estate), has proved an ideal environment for maximizing estate planning and minimizing tax consequences for high-net-worth estates. However, storm clouds currently loom over this tax planning bonanza, leaving some taxpayers to worry that they may have missed the boat.

What many taxpayers may not realize is that the doubling of the unified credit effectuated by the TCJA was specifically designed to be temporary, expiring by its own terms, on December 31, 2025. For those in the know, this sunset provision established a window of opportunity with which to “use or lose” this enhanced exemption amount via lifetime estate planning. However, the gift and estate tax reform agenda proposed by the Biden/Harris White House advocates more aggressive changes to the unified credit exemption, potentially occurring much sooner than 2025.

The Biden/Harris tax plan calls for the restoration of the gift and estate tax to “2009 levels” and projects that doing so will increase revenue by nearly $281 billion dollars over the next 10 years. A return to 2009 levels would mean a dramatic reduction from $11.7 million dollars to $3.5 million in estate tax exemption. Even more significant is a proposed reduction of the gift tax exemption to a mere $1 million! With a current tax rate of 40% (with the possibility of an even higher rate applied for larger estates), the passage of such proposed changes may be a tax quagmire for those with family businesses, significant real estate holdings, or large taxable estates of any kind.

An even more wide-reaching tax reform issue is the Biden/Harris proposal to tax capital gains at 39.6% on income over $1 million dollars, and to eliminate the step-up in cost basis upon death. It has long been the rule that when property is transferred upon death from a decedent to beneficiary, the basis for that property is stepped up to current fair market value. This provides a tremendous advantage where a taxpayer is inheriting low or zero basis property - essentially erasing all capital gain which would have been due had the property been sold in the decedent’s hands. This advantage benefits both large and small estates, and is often a counterargument to gifting away low basis property, since the value of the step-up in basis must be weighed against the potential estate tax savings.

So, what does this all really mean for taxpayers? Politicians make proposals and tout policy agendas and changes all of the time; however, it doesn’t necessarily mean their wish list will ultimately become law. Still, it is worth noting that the odds for significant estate tax reform being implemented during the Biden administration has increased after the Democrats effectively secured a majority in the Senate. Of course, passage of any sweeping changes would require strict partisanship on a legislative vote (a feat not so easily accomplished as evident from even the earliest days of the Biden administration), but still, neither impossible nor improbable.

Of course, everything in Congress is subject to negotiation and horse-trading. It is certainly conceivable that estate tax reform and capital gains tax reform may turn out to be less dramatic than discussed above, or it may not occur at all as part of a political trade-off or as part of typical Washington D.C. gridlock.

So what changes can we expect? Expert opinions range from significant changes in the federal estate tax exemption (imposed retroactively to January 1, 2021) to a dismissal of the entire concept of sweeping changes before, at least the next mid-term elections. Taking a practical approach, it would seem prudent for those with large estates to consider executing more aggressive estate planning while the unified credit remains historically generous.

People have very strong feelings about the concept of a gift and estate tax. Some consider it a punitive and unfair double tax on post-taxed dollars, while others believe it is a progressive tax concept and an effective means of addressing wealth inequality. If increased taxation is the stated policy and legislative objective at a given moment, the gift and estate tax is an easy target. Regardless of where you stand on the issue, one thing is a near certainty – there will be increasing pressure to increase tax revenues post-pandemic, and the newly enacted generous gift and estate tax exemption is clearly in the political majority’s crosshairs. Taxpayer beware!

For more information on the topic discussed, contact:

• Jordan S. Linn  |  linn@thsh.com  |  212-508-6724