Estate Tax Planning: Possible Changes Ahead

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By Jim Rein, CPA

No matter what the presidential outcome, there was never any question that the outlook for estate planning would be different in 2021.  How much different was dependent upon who controlled the presidency and the Congress.  With Democrats now in power on both of those fronts, the logical question now is this:  What can we expect to see from the Biden Administration?

Until we know what Biden’s tax proposals will be and what may be passed by Congress, planning remains a challenge.  However, it’s not too soon to consider how the Biden Administration could affect business and tax planning for the near future.  As an estate planner and tax consultant, I can attest to the fact that those who prepare for multiple scenarios and outcomes, are always better positioned to pivot and adjust for the greatest benefits.

Potential Estate Tax Changes

It should be noted that while we don’t believe these tax policy changes will be enacted immediately – due to the focus on the pandemic – they are on the horizon and can have significant impacts on tax planning.

Current Estate and Gift Policies

The estate/gift exemption is currently (2021) $11.7 million with an estate and gift tax rate of 40% for estates above that threshold.

Biden’s Proposed Estate and Gift Policy Changes

We are expecting lower exemptions and increased tax rates to “historic levels.”  What this might look like:

  • Reduced exemptions (some are speculating a reduction to $3.5 million for estate tax exemption, and $1 million for the lifetime gift tax exemption)
  • Increased maximum estate and gift tax rates (expectations are 45%)

We have also heard discussions about the potential elimination of a step-up in basis for inherited property – affecting taxpayers of all income levels.

Current Income Tax Basis Rules for Inherited Property

Currently, the income tax basis of property is stepped-up to the fair market value at death.  Therefore, any appreciation in the property during the life of the decedent escapes income tax.

Biden’s Proposed Tax Plan for Inherited Property

From everything we have seen, the Biden Administration intends to change current policy by either requiring the decedent’s estate to pay capital gains tax on the appreciation in the property at the time of death, or by eliminating the step-up in tax basis so that heirs will ultimately pay tax on the appreciation when they sell the property.

K·Coe Pro Tip: 

If you have a net worth above the threshold where your assets would be subject to estate tax, you should speak with a professional advisor about planning that can be done to mitigate that risk.

Alleviate long-term headaches by making important business and personal tax planning considerations around estate and gifting decisions now.

 

For questions regarding estate tax planning in 2021, and maximizing your returns, contact a specialized K·Coe advisor.

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