Estate planning attorneys saw a lot of 2020 year-end gifting. Many people are trying to plan for the possibility of some of the previous administration’s reforms being rolled back – especially the estate tax lifetime exemption (currently set at $11,000,000, adjusted for inflation) now that Biden has been elected president and Democrats control both the House and Senate.
President Biden is entering the White House during a historic and very difficult time. Many people have suffered great loss this year, especially as a result of the Covid-19 pandemic. The focus of his inauguration address was a call for unity and for getting the pandemic under control. At this point, tax reform does not seem to be one of President Biden’s first main goals.
Most legislation requires 60 votes in the Senate to pass, so Democrats would need both Republican support and to keep the support of moderates in their own party in order to pass tax reform. Although it is possible that tax reform could pass late in 2021 and be retroactive to January 1, most tax advisors don’t think this is likely. Instead, if tax reform does pass this year, many think it is more likely to happen toward the end of the year and be effective in 2022.
Here are five ways that tax reform might affect your estate planning:
• Estate tax exemption – Under the tax laws in place, the current $11 million lifetime exemption amount (adjusted yearly for inflation) is scheduled to expire on December 31, 2025. It will then drop back down to $5 million (also adjusted for inflation). Biden’s campaign website did not state his proposal for a new estate tax exemption amount. However, the Tax Policy Center has estimated that the exemption would be reduced to $3,500,000 under Biden’s plan.
• Estate tax rate change – The estate tax rate currently set at 40% could increase. It was as high as 55% in 2001.
• Lowering the gift tax – The estate and gift tax exemption amounts are both set at $11 million (adjusted for inflation). The gift tax exemption amount, however, could be lowered to $1 million.
• Elimination of the step-up in basis at death – Many individuals with a highly appreciated asset, such as stock, will pass it to their heirs instead of selling it during their lifetime to avoid paying a capital gains tax. The heirs will then receive a step-up basis of the asset’s value. If the heirs sell the asset right away, there is no gain on the sale so they will not need to pay any capital gains tax. However, if the step-up in basis at death is eliminated, heirs would then have to pay capital gains tax on the inherited property.
• Potential increase in capital gains rate – For those making more than $1 million annually, Biden’s proposed tax plan recommends increasing the long-term capital gains tax rate to the level of ordinary oncome.
While we are still near the beginning of 2021, it isn’t too early to begin planning for how potential major tax reform changes might affect you and your estate planning.
For help with your estate plan, contact us at Wilson and Wilson Estate Planning and Elder Law, LLC at 708 482 7090 for our main office in LaGrange, Illinois or at 847 656 8958 for our Northbrook, Illinois office.