Looking towards estate planning changes under new administration

Tax changes are expected under the new administration. We don’t know how quickly President Joe Biden will move to enact his tax proposals, or whether the Democrats’ thin margin in Congress will be a moderating force.

Many analysts believe that economic recovery will be the administration’s first priority, meaning we might not see immediate action. But the pandemic has required high levels of government spending that could accelerate demand for tax increases.

Now is the time to be talking with an estate planning attorney to review potential tax changes and consider whether you want to implement certain strategies sooner rather than later.

The following proposals were included in Biden’s campaign plans and may require planning:


Decrease in estate and gift tax exemptions: Biden has proposed decreasing the federal estate and gift tax exemptions. The estate tax exemption could drop to the pre-Tax Cuts and Jobs Act level of $5 million per individual, adjusted for inflation, or as low as 2009-levels of $3.5 million per individual, according to some analysts. Anything over the exemption amount could be subject to a 40% estate and gift tax, or an increased top tax rate of 45%.

Currently, the federal estate tax exemption is $11.7 million per individual. Without further legislative action, this exemption will sunset on December 31, 2025, reverting to $5 million, adjusted for inflation.

Increase in long-term capital gains (LTCG) tax: Biden has expressed an intention to increase LTCG taxes for taxpayers earning more than $1 million per year. If you fall into that category, you may want to reduce your exposure to high dividend paying stocks or funds with large capital gains distributions in your taxable accounts.

If you have large investments you were expecting to sell off in the next few years, you may want to accelerate those plans and sell now in order to take advantage of the lower rate. Likewise, business owners who are considering an exit may also want to speed up their transition plans. At this point, you need to weigh maximizing business value against maximizing net after-tax proceeds.

Flat tax credit on retirement contributions: Biden has proposed eliminating the deductibility of retirement plan contributions, and instead providing a flat retirement plan contribution credit of 26%. That would make retirement contributions less attractive for taxpayers in higher tax brackets and could make after-tax retirement vehicles more popular for those savers.

Removal of stepped-up basis: Currently, when you leave property to an heir, the basis of that property is “stepped up” to the market value at the time of your death. That means your heirs can receive the increased value of that asset without having to pay capital gains taxes.

Under Biden’s campaign tax proposal, this stepped-up basis would go away. Your heirs would have to use the value the asset had when you purchased it when calculating taxes. Essentially, if you purchased an asset for $1 million, but it was valued at $5 million when it was inherited, your heirs would have a tax burden on the $4 million gain.

Cap on itemized deductions: Biden’s plan could cap itemized deductions at 28% and restore the “Pease limitation,” which would phase out itemized deductions for taxpayers with income above $400,000. For taxpayers accustomed to making large, tax-saving charitable gifts, this could significantly reduce their tax benefits.

Generally, tax legislation is applied on a go-forward basis, meaning we might not see changes until January 1, 2022, or later. However, mid-year changes as well as retroactive effective dates are possible.

Tax changes are often unpopular and some of the moves outlined above (particularly changes to the step-up in basis) will be met with resistance. Work with your estate-planning advisor to create flexible estate and gift plans that can pivot with fluctuating tax laws whenever possible.

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