With the presidential election quickly approaching, it’s important for individuals with large estates to begin considering how the presidential election may affect their estate planning. Today’s record-high estate exemption amounts are not likely to last forever, so taxpayers may want to start thinking about how they can take advantage of the current estate tax laws before they change.
Current Law
The current lifetime estate exclusion amount is $11,580,000 per taxpayer, or $23,160,000 for a married couple. Estates in excess of the exclusion are currently taxed at 40%.
Potential Changes in Estate Taxes
Depending on who is elected, estate tax treatment could change drastically. Below are the main points each candidate proposes and how it would impact estates.
Estate Taxes Under Biden
- Repeal of stepped-up basis
- Increase in capital gains taxes
- Likely a lower exclusion amount
Stepped-up Basis
Biden has proposed to repeal stepped-up basis at death. Currently, an individual may hold an asset for many years, during which the asset typically appreciates in value. When the taxpayer dies and passes an asset to an heir, the basis– the owner’s original investment in the asset–rises to the market value as of the date of death. The heir then inherits this asset “stepped-up basis.” If the heir chooses to immediately sell the inherited assets, he or she can do so with minimal to no income tax on capital gains. Elimination of stepped-up basis will result in increased capital gains taxes for those that inherit the assets.
Capital Gains
The current maximum long-term capital gains tax rate for 2020 is 20% plus 3.8% Net Investment Income tax for single households with more than $441,451 in taxable income and $496,601 for married-filing-jointly. Those in lower tax brackets may qualify for 0% or 15% long-term capital gains rates.
While Biden has not proposed any specific changes to the exclusion amount or estate tax rate, he has hinted at returning to a “historical norm” which some have interpreted to be $5 million, prior to the Tax Cuts and Jobs Act (TCJA), or possibly $3.5 million as it was in 2009. This would dramatically increase the number of taxpayers that would now be subject to estate tax.
Taxpayers may want to rethink current planning and consider whether it’s advantageous to make more lifetime gifts, keeping in mind income tax vs. estate tax and their tax rates vs. their heirs’ tax rates.
Estate Taxes Under Trump
- 40% tax on estates/lifetime gifts above $11.58 million per taxpayer
- Expiration & reduction of exemption amounts after 2025
If President Trump is re-elected, the current estate exemption is set to expire at the end of 2025. When the TCJA sunsets, exemption amounts will be reduced to $5,000,000, or $10,000,000 for a married couple, indexed for inflation.
Estate Planning for the Future
People with net assets in excess of $3.5-5 million may want to start thinking about gifting plans to reduce their overall taxable estates. According to “anti-clawback” regulations published by the IRS, gifts made using today’s high exemption amounts are protected from future tax when the exemption amounts are reduced. These regulations offer a major incentive to use these high exemption amounts before it is reduced. Those who could be affected may want to start planning now so they’re positioned to make gifts if the lifetime exemption would drastically decrease.
Contact an Anders advisor below to see which gifting techniques could work best for your situation, or learn more about Anders Family Wealth and Estate Planning services.
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