The results are in, and regardless of which side you were rooting for, now is a good time to prepare for changes ahead in the new year. While President-elect Joe Biden has not yet provided concrete details on his plans to modify estate taxes, he has indicated that he supports raising estate taxes and changing the taxation of capital assets upon death.
Under current legislation, assets that pass directly to heirs benefit from a tax planning tactic called a “step-up in basis”. This means that an individual may hold onto an asset for many years as it appreciates in value, then pass it to an heir at their death. The basis (the original investment in the asset) rises to the market value as of the date of death, and the heir inherits this “stepped-up basis”. Additionally, the heir benefit from a reduced (or no) capital gains tax if the heir chooses to sell the holdings they have inherited.
Under Biden’s proposed plan, tax would be levied on an asset’s unrealized appreciation at the time of death, doing away with the step-up in basis, and requiring the estate to pay taxes on the gains if they are sold. His proposal would also increase capital gains taxes.
Additionally, Biden’s proposed plan would also reduce the federal estate tax exemption—the amount you may give away during your lifetime and own at your death without subjecting it to a 40% estate tax. Under current law, the federal estate tax exemption is $11,580,000, with a planned reduction to $6,000,000 as of December 31, 2025. Under Biden’s proposed plan, the federal estate tax exemption would halve the planned reduction amount, while increasing the estate tax rate from 40% to 45%. Typically, tax laws take effect in the calendar year after they are passed, so it’s possible that new rules could be enacted in 2022.
Of course, any potential tax changes would need Congressional approval to proceed, so these changes are certainly still only one possible scenario. However, it may be beneficial to keep these changes in mind as you are managing your investments and estate plans as we move into the new year.
Do you have a question about your estate plan, and how your taxes may be impacted in 2021? Leave a comment below, or feel free to contact me directly, I’m happy to help.