Joe Biden has been declared the winner of the 2020 Presidential election by key news outlets and more and more states continue to certify their election results in his favor. We still await the official certification of each state election which may take to December or January.
One thing we know for sure is that the 2020 election and its aftermath pretty much so guarantee substantial changes in the tax law. Though it’s all still unknown, we can glean significant details from the Biden-campaign rhetoric to help us prepare for the future.
Here is what we know to date about President-Elect Biden’s proposals that impact your estate planning:
Estate, Gift, and Generation-Skipping Transfer (GST) Tax
The 2020 estate and gift tax exemption is $11.58 million (per taxpayer), with asset values in excess of that amount taxed at 40% before passing to your heirs. This exemption amount is slated to be reduced the end of 2025 to $5 million (per taxpayer). This is what we know for sure under present law.
During President-Elect Biden’s campaign he embraced legislation that would reduce both the estate and GST tax exemptions to $3.5 million per taxpayer and lower the lifetime gift tax exemption to $1 million per taxpayer.
President-Elect Biden has also discussed additional proposed legislation that intends to restrict annual and aggregate donor limits on gifts to certain irrevocable trusts and family limited partnerships. That would put a dent in our advanced planning tools without a doubt so time is of the essence. Get your advanced planning completed now and ensure it’s grandfathered in before the changes come.
Moreover, numerous Democratic tax reform proposals suggest returning estate tax rates to historical norms. So what does that mean exactly? Back in the 1940s, the top estate tax rate was 77%, and under 2001 federal tax law, the rates were as high as 45-55%.
We’re expecting to see an upward adjustment in the estate and gift tax rates. The good news is that our clients who have committed to advanced planning before these changes will be safe. Remember, paying the estate tax is a choice because it’s easily planned around if your committed to advanced planning!
Capital Gains Taxes
Current law taxes capital gains at regular income tax rates when those gains are realized on property held for less than one year. For long-term capital gains (which are gains on property held more than a year), there is a graduated tax rate contingent upon the taxpayer’s income level (0%, 15%, or 20%).
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% surtax added to their capital gains tax rate.
Current tax law also permits for a step-up in basis of appreciated property at the death of the property owner. This allows heirs who inherit property to sell the property shortly after the owner’s death with little or no capital gains tax on the sale of the inherited property.
Present law also allows for like-kind exchanges on appreciated property such as real property and artwork. This allows taxpayers to reinvest the gains on appreciated property into similar types of property without incurring capital gains tax when the property is sold.
If the taxpayer keeps making such like-kind exchanges on appreciated property until the individual’s death, the capital gains built up in that property will be eliminated by the step-up in basis rules.
Under a Biden presidency the step-up in basis rules would either be eliminated or impose recognition of gain on property at each taxpayer’s death. Furthermore, the Biden tax proposal eliminates like-kind exchanges and imposes a 39.6% long-term capital gains tax rate for individuals earning more than $1 million a year. With the addition of the 3.8% surtax on net investment income, the effective federal tax rate on long-term capital gains would exceed 43% for high earners.
This means many taxpayer’s estates could see significant increased capital gains tax bills upon death.
What to do Now
You can still take some concrete steps to prepare while you wait for the upcoming changes. There are solid advanced estate planning strategies that can help preserve a family legacy and protect the next generation from estate tax as well as protect our children from their future decisions while disinheriting the IRS.
While taxes are certainly important, they should not overshadow the need to get your personal affairs in order in case of disability or death. Remember, none of us gets out of here alive. Consequently, having your personal and spiritual affairs in order are priceless.
If you have not started planning or it has been 3 years of more since you had your estate plan reviewed, your Trusts, Wills, powers of attorney, and healthcare directives could become stale, or worse, no long align with your goals, so now is the time to get it done.
Putting your estate plan in place or reviewing an existing estate plan goes a long way towards establishing peace of mind for your family and creates security for you and your family legacy in these ambiguous times.
We Are Here to Help
No one knows for sure what the future holds for our country or for our family legacies. Nevertheless, what is certain is that here at the Borkuslaw Group we will continue to examine tax law developments closely and keep you updated as the rules evolve.
Moreover, we are always here to guide you through your family’s legacy planning, business succession planning and estate planning.
Contact our team at Borkuslaw Group today and make a live online appointment!
Please note that information contained in this news alert is not and should not be construed as legal advice or opinion nor does this information alert create an attorney-client relationship.