In the event Joe Biden wins the U.S. presidential election, will there be repercussions for the federal gift and estate tax exclusion? How will estate planning be affected?
The current estate and gift tax exemption is $11.58 million per individual in 2020. This means that individuals may leave up to $11.58 million to their heirs, free of estate or gift taxes. For estates worth $11.58 million or more, the estate can be required to pay up to 40%. The exemption at its current level is scheduled to end in 2025, at which point it will revert back to $5.8 million. According to Biden’s campaign website, he wants to change estate taxes to the “historical norm,” which could signal that the exemption would be lowered to at least $5.8 million prior to 2025. Some say Biden’s proposal suggests the exemption could be reduced to an even lower amount.
There are also signals that Biden would make other tax changes which would affect everyone’s estate. Currently, assets that pass directly to heirs benefit from what is called a “step-up in basis.” This means the heir receives the asset valued as of the date of death. This allows heirs to minimize taxes because he or she pays no capital gains taxes if they sell the asset immediately.
However, Biden’s proposed tax plan may change this current structure. According to the Tax Policy Center, his proposal is to tax an asset’s unrealized appreciated value at the time of transfer. When someone dies and their assets transfer to an heir, this transfer will be a taxable event, and taxes on the gains would be required. Exactly how this will be done, and what exceptions may apply, remains unclear.
Of course, nothing is for certain and these proposed tax changes would first have to obtain Congressional approval. However, in the event Biden wins the election and these changes become effective, it will change the way people manage their investments and structure their estate planning. For example, it may cause people in higher tax brackets to invest more conservatively; people may utilize a gifting strategy throughout their lifetime to mitigate taxes; people may be more interested in leaving a portion of their estate to charitable causes; and life insurance may become a primary tool to mitigate any high tax liability from an inheritance. Some individuals with substantial assets may want to utilize any unused gift and estate tax exemption amounts before the end of 2020.
If you have questions regarding your estate planning, please contact Katherine Deets or Allison Beard of our Estate Planning Practice Group, via email at firstname.lastname@example.org or email@example.com, or via telephone at 360-671-1796.