In the lead up to the Georgia Senate runoff elections, a question on everyone’s mind was how the estate and income tax legislation would be affected if the Democrats won a majority. Now that senators Jon Ossoff and Raphael Warnock have been cemented into their positions, change is sure to come. Exactly how much change is still uncertain.
The Biden tax plan regarding income taxes proposes a slew of changes, largely impacting the ultra-wealthy upper class and affording moderate earners a break. During election campaigns, Biden held fast that taxpayers earning below $400,000 would be exempt from tax increases under his plan.
Biden’s tax plan also has significant implications when it comes to estate planning. Among the policy, proposals are changes to the step-up in basis at death and changes to lifetime federal estate and gift tax exemptions.
The Democratic hold over the Senate is tenuous. The house is divided 50-50 between Republicans and Democrats, with tie-breaking votes resting in Vice President Kamala Harris’s hands. With such a marginal hold over the Senate, it is unlikely that all of Biden’s proposals will pass.
Estate Planning Changes Under the Biden Administration
The future of estate planning under President Biden is still up in the air, so how can taxpayers plan for potential changes to come? While nothing is set in stone, there are a few noteworthy aspects of the Biden tax plan that could directly impact estate planning.
The Biden tax plan proposes reverting federal estate tax exemptions for individuals back to $5 million per individual and $10 million per married couple or decreasing it to as low as $3.5 million per individual. This means that wealthy individuals who surpass the $5 million margin could be taxed at a 40% rate or higher. Biden has floated the idea of increasing the rate to 45%.
The legislation would cut the former Trump administration’s $11.58 million thresholds in half. The generation-skipping transfer tax exemption threshold also currently sits at about $11 million and could be similarly reduced.
Biden’s plan also proposes lowering the gift tax exemption. Like the estate tax exemption, the gift tax exemption currently sits at about $11 million. Under the Biden tax plan, the gift tax exemption threshold could be lowered to $1 million. Note that New York does not currently have a gift tax.
The Biden administration’s tax plan could see the step-up in basis at death eliminated. Currently, individuals who inherit an asset after a relative’s death receive a step-up in basis of the asset’s value, meaning the asset’s value is readjusted with the current market value in mind.
If an heir decides to sell an inherited asset, they are not required to pay a capital gains tax, as they would have made no gains from the asset’s sale. If step-up in basis at death were to be eliminated, individuals would have to pay capital gains taxes on inherited assets they sell.
Biden’s tax plan could also increase the current capital gains tax rate of 23.8% for high earners to 39.6%. If passed, the capital gains increase would be the largest in history. An increase in the capital gains tax is likely to cause a surge of stock sell-offs from investors endeavoring to capitalize on the current lower tax rates.
Is Biden’s Plan Likely to Pass?
Given the government’s historical spending in response to the ongoing pandemic, a tax increase of some sort seems almost inevitable.
Biden’s moderate proposals are likely to pass. The real trouble will come when the Senate votes on imposing higher taxes on the rich. Although Biden’s tax plan does not propose a wealth tax in so many words, the lowered threshold on estate taxes will likely be perceived as unjust and adversarial.
Although the Democrats have a narrow majority, legislation requires 60 votes to avoid a filibuster. For Biden’s tax plan to come to fruition, democrats will need to appeal to a handful of Republican members. They will likely be met with resistance from Republicans, who are known to favor tax breaks for the wealthy and lower taxes in general.
Moderate Democrats may also be on the fence when it comes to increased taxes for the rich. With that in consideration, compromise is more likely than the enactment of Biden’s plan in full.
How Much Time Will I Have to Prepare?
It’s safe to say that the Biden administration has its hands full with the COVID-19 pandemic still ravaging the country. With “healing” the country and vaccinations on everyone’s mind, tax reform will likely be a back-burner topic for some time.
Tax reform could pass in late 2021 and be retroactively dated to January 1st, but experts have weighed in, saying such an outcome is unlikely. If tax reform does pass in the Senate, it will likely come into effect early in 2022. A retroactive date of January 1st is unlikely to pass in the Senate.
What Should You Do Now?
2021 may be the last year for quite some time when you have the ability to transfer wealth to your family, without paying exorbitant taxes on these transfers. As a result, if your family may be affected by these proposed estate tax changes, call us at 212-709-8112 or book an appointment using this link to discuss your planning options.
Katya Sverdlov, CFA, Esq.
Sverdlov Law PLLC
30 Wall Street, 8th Floor
New York NY 10005
YouTube: Short Videos