Posted by Robert L. Arone
After several days of counting ballots, Joe Biden has been declared the winner of the 2020 Presidential election by many major news outlets. Although we await the official certification of the election by each state, an official concession by President Trump, and the outcome of several pending lawsuits–which could take us into December or even January–the 2020 election and its aftermath promise significant changes in how our clients will be taxed. While it is unlikely that every proposal discussed during President-Elect Biden’s campaign will become the law of the land, we can still glean essential details from all the campaign rhetoric to help us prepare to weather these possible changes.
Proposed Policy Adjustments under a Biden Presidency
Here is what we know so far about some of President-Elect Biden’s key proposals that are most relevant to our clients’ estate planning:
Estate, Gift, and Generation-Skipping Transfer (GST) Taxes
For 2020, the estate and gift tax exemption is set at $11.58 million (indexed for inflation), with any wealth over that amount being taxed at a 40 percent rate as it passes to heirs. This exemption amount is scheduled to be lowered in 2025 to $5 million (also indexed for inflation) unless new legislation is passed before then.
President-Elect Biden suggested during his campaign that he would support legislation that would reduce both the estate and GST tax exemptions to $3.5 million per individual and would lower the lifetime gift tax exemption to $1 million. Other proposed legislation that President-Elect Biden has discussed, favorably proposed by Senator Bernie Sanders, aims to place annual, aggregate donor limits on gifts to certain types of entities such as irrevocable life insurance trusts and certain pass-through entities such as family limited partnerships.
In addition to reduced transfer tax exemption amounts, several Democratic tax reform proposals have suggested returning estate tax rates to historical norms. What does that mean? In the 1940s, the top estate tax rate was 77 percent, and under 2001 federal tax law, it was as high as 45-55 percent. As a result, we may well see an upward adjustment in the estate and gift tax rates.
Capital Gains Taxes
Our current law taxes capital gains as regular income if those gains are realized on property held for less than one year. For long-term capital gains (gains on property held for a year or longer), there is a graduated tax rate depending upon the tax filer’s income level (0 percent, 15 percent, or 20 percent). For individuals and couples who earn more than $200,000 and $250,000 per year respectively in net investment income, there is an additional 3.8 percent surtax added to their capital gains tax rate.
In addition, the current law allows for a step-up in basis of appreciated property if the property is held until the owner dies. This allows for inherited property to be sold or liquidated shortly after the owner’s death, with little to no capital gains taxes assessed on the property’s sale.
Today’s law also allows for like-kind exchanges of appreciated property such as artwork and rental properties. This allows clients to reinvest the gains that they earn on appreciated property into similar types of property without ever having to pay capital gains taxes when the property is sold. If the client keeps making such like-kind exchanges on appreciated property until the client’s death, the capital gains built up in that property will be erased by the basis step-up rules.
Proposed changes under a Biden presidency would either (1) eliminate the step-up basis rule for inherited property and impose a carryover basis rule for inherited property or (2) impose recognition of gain on property at the owner’s death. Additionally, the Biden tax plan proposes eliminating like-kind exchanges and imposing a 39.6 percent long-term capital gains tax rate on individuals earning more than $1 million per year. And if the 3.8 percent surtax on net investment income remains in place, the effective federal tax rate on long-term capital gains could exceed 43 percent.
If these changes are implemented along with the changes to the estate tax laws discussed above, many estates could see significant tax bills at the death of the estate owner.
What to Do in the Meantime
Although it may be too early to know exactly what the tax laws will look like in 2021, we can nevertheless provide some concrete guidance to our clients while we wait for answers. Tax issues, while certainly important, should not overshadow the need for clients to get their affairs in order in case of an untimely death or disability. If it has been some time since they have reviewed their estate planning documents such as their wills, trusts, powers of attorney, and healthcare directives, now is a great time to have them do so. Providing an encouraging reminder to clients to review these important planning elements can go a long way to helping them find peace and security in these uncertain times. And that is the kind of value that fosters long-term loyalty from clients.
We Are Here to Help
No one knows for sure what the future holds for our country. However, what is certain is that we will continue to monitor the latest tax law developments closely and keep you updated as they unfold. In the meantime, if you have any questions or concerns, please do not hesitate to contact us. We are here for you and your clients.