Proposed Policy Changes Under the Biden Administration that Could Affect Your Estate Planning

After several days of counting ballots, Joe Biden was declared the winner of the 2020 Presidential election by many major news outlets.  The 2020 election and its aftermath promise significant changes in how Americans 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 the campaign 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 Biden’s key proposals that are most relevant to your estate planning: 

1. 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) such that any wealth over that amount is taxed at 40 percent 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.  

Biden’s Proposed Policy Changes

President 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.  

President Biden has discussed other proposed legislation, favorably proposed by Senator Bernie Sanders, that 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.  

How This Proposed Policy Could Affect You

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% whereas, under 2001 federal tax law, it was as high as 45%-55%.  As a result, we may well see an upward adjustment in the estate and gift tax rates.

2. 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 one 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.  

The current law also 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 tax assessed on the sale of the property.  

Today’s law also allows for like-kind exchanges on appreciated property such as artwork and rental properties.  This allows people to reinvest the gains that they earn on appreciated property into similar types of property without ever having to pay capital gains tax when the property is sold.  If the individual continues to make such like-kind exchanges on appreciated property until that individual’s death, the capital gains built up in that property will be erased by the basic step-up rules.  

Biden’s Proposed Policy Changes

Proposed changes under a Biden presidency could either (1) eliminate the step-up in 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.

How This Proposed Policy Could Affect You

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.  

How You Can Prepare

Although it may be too early to know exactly what the tax laws will look like for 2021, we can still take some concrete steps to prepare while we wait for answers.  Tax issues, while certainly important, should not overshadow the need to get your affairs in order in case of an untimely death or disability.

If you have not recently reviewed your estate planning documents (Will, Trust, Power of Attorney, and Advance Health Care Directive), now is a great time to do so.  Reviewing these important aspects of your estate planning can go a long way toward creating peace and security for you and your loved ones in these uncertain times.

Contact Syntero Group to Learn More

No one knows for sure what the future holds for our country, especially in light of the COVID-19 pandemic.  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.

*In our efforts to quickly provide you with the most up-to-date information on the potential tax ramifications stemming from these unique election events, we did not include the 2018 update of the Tax Cuts and Jobs Act (TCJA) limiting Section 1031 like-kind exchanges to real property. 

Under current law, exchanges of real property used in a business, trade, or investment enjoy Section 1031 like-kind exchange treatment, whereas, as a result of the change made by the TCJA, like-kind exchanges of personal or intangible property are now a taxable event.  A transition rule allowed for like-kind treatment in some exchanges of personal property if the taxpayer disposed of the personal or intangible property before the law went into effect.  Please note that it will not constitute a like-kind exchange when the real property is held primarily for sale. Our sincerest apologies for any inconvenience or confusion this may have caused.  We will continue to keep you updated on his proposed tax plan and laws that will impact you.