Overview of Proposed Changes
There are many proposed changes we won’t dig deep into, but for a quick rundown, President-Elect Biden proposes: increasing the top tax bracket for individuals (to 39.6%) and corporations (to 28%); adjusting the rules for Grantor Retained Annuity Trusts (GRATs); applying a new form of alternative minimum tax (AMT); increasing payroll taxes for those earning more than $400,000; eliminating the carried interest “loophole”; increasing the rate of long-term capital gains tax for taxpayers earning more than $1,000,000; introducing new credits (or in some cases replacing deductions with credits) for renters, for retirement plan contributions, for payment of health insurance premiums, for purchase of long-term care insurance, for caregivers of the elderly; increasing the credit for children and dependents; restoring the first time homebuyer credit; and implementing student debt forgiveness in certain cases. Though many of these changes affect our clients, the proposed changes keeping many estate planners up at night are the potential repeal of the step-up in basis when transferring property at death, and the changes in estate tax exemption.
Step-Up in Basis Repeal
When a Decedent dies, his or her property that is being inherited by his or her beneficiaries has typically appreciated in value since the Decedent purchased it. As the law stands today, the beneficiaries inherit the property with a basis in the property valued as of the day of death of the Decedent. Therefore, when (and if) the beneficiary later sells the property, his or her gain on the property will be calculated from the value as of the date of death when the beneficiary inherited it. Should the repeal of the step-up in basis take effect, then the beneficiaries will instead inherit the property with a transfer basis—meaning they take the basis the Decedent had in the property (ok, you say, but why do you care about your basis?). An example of the contrast in the current and proposed law is as follows: the elderly parent lives in the home he or she purchased when his or her children were young. The parent raises children in the home and lives there until death. The now adult child inherits the childhood home and having no need for it, plans to sell it. Over many decades, the home has appreciated from the $75,000 original purchase price to $150,000. Without the change in the law, the child inherits the property with a $150,000 basis and sells the property shortly thereafter with virtually no capital gains consequences. If the proposed law passes, the adult child inherits the property with a $75,000 basis and if he sells it, will have to pay capital gains on the $75,000 appreciation. Of course, this scenario exists outside of just real property; think stock portfolios, bonds, precious metals, and so on. This change could be implemented as described (not to be paid until the beneficiary sells the property) or alternatively, the death of the owner could become a realization event, making the tax on the gains due upon death of the Decedent/owner. As you can see, this proposal affects people of all socio-economic status. The step-up has been repealed before. Each time, the repeal was short-lived due to its unpopularity and difficulty to execute due to poor record-keeping.
Changes to Estate Tax Exemption
The other proposed change getting estate planners’ attention is the change in the estate tax exemption. The estate tax exemption for 2021 is $11,700,000. This means that upon your death, if your estate is less than $11,700,000, no federal estate tax is due. Any amount in excess of this amount incurs a 40% tax liability (note that if you are married, you can take advantage of twice the individual amount upon the first spouse to die, effectively providing an estate tax exemption of $23,400,000). President-Elect Biden has proposed bringing the estate tax exemption values to $3,500,000 per person (back to the 2009 numbers, indexed for inflation). Further, his proposal includes a 45% tax on anything in excess of the exemption amount, rather than the 40% under current law. This change likely gets the attention of many individuals who between their residence, life insurance, and every day investments or retirement accounts may be in danger of losing nearly half their estate to estate tax upon death. It is worth noting that the current exemption amount put into place by President Trump’s Tax Cut and Jobs Act in 2017 is set to sunset in 2025. This means that if no change in the law occurs before, then on January 1, 2026 the exemption amount will go back to pre-TCJA numbers, that is $5,450,000 indexed for inflation. In any case, it seems likely a change to the estate tax exemption is on the horizon.
If you have questions about the effects this may have on your plan, please contact us for a consultation at 713-759-9977
. No matter the outcome, our attorneys are here to guide you, your family, and your estate and businesses through these changes. Your business is our business.