If this year has proven anything, it’s that current affairs are far from stagnant. Undeniably, the Covid-19 pandemic has affected the country fiscally, whether that be on an individual level or our nation as a whole. With the presidential election looming, the future of estate taxes is up in the air. How will the outcome of the coming election affect estate planning?
It is likely that not much would change on the estate planning front if Trump were to be re-elected. However, Biden’s plans would change tax laws unfavorable to more affluent people with a goal of reducing the budget deficit.
Firm Changes to Estate Tax Exemption Laws May Impact Those with High Net Worth
One of Biden’s proposals plans to change tax exemption laws pertaining to federal gift or estate taxes. Currently, assets transferred under the amount of $11.58 million are free of tax, but, if Biden is elected, this could drastically decrease before the exclusion expires in 2025. Obviously, this issue does not affect everyone, but those with higher net worths should be preparing for it.
Long-Term Capital Gains Tax Rates Would be Changed by Biden
In addition to exemption laws, Biden’s plan would affect the rules for taxation on long-term capital gains. Currently, those rates are set at 0% for people with an annual income of 40,000, 15% for incomes between $40,001 and $441,450, and max out at 20% for incomes above $441,451. Biden would change this to a 39.6% tax (or higher) for individuals with an income of over 1 million.
Transfer Tax Rates Would Increase by 5%
As far as transfer tax rates go, Biden would likely raise the tax by at least 5%. Currently, taxes on transfers of assets at death to beneficiaries are subject to a top marginal rate of 40% in federal estate tax at death (not including taxes imposed by the state the decedent resides in).
Higher Capital Gains Taxes for Inherited Assets and Elimination of Step-Up
Biden has also proposed eliminating the income tax basis adjustment at death. While most assets currently receive income tax basis adjustment to fair market value at the taxpayer’s date of death, this may be eliminated, resulting in higher capital gains taxes for inherited assets. Currently, the basis step-up allows heirs to sell assets shortly after death free of or with minimal capital gains taxes on assets that were acquired prior to the decedent’s death. In reintroducing the Obama administration proposal, a market-to-market tax would be appreciated at the time of death. However, he may eliminate step-up entirely.
Estate Planning Tools Could be Effected
Lastly, popular estate planning tools like short-term GRATs (grantor retained annuity trusts), valuation discounts, GST (generation-skipping transfer) trusts, and grantor trusts in estate planning transactions may all be affected.
In the event Biden is elected, these changes may go into effect in early 2021. With all of this in mind, it is important to stay on top of your estate plan and it’s not advisable to wait until the end of December to start revisiting your options. Caress Law can help you update your plan—or draft a new one—that makes sense for whatever your situation may be. Click here to get started, or complete the brief form below to contact our Portland, OR estate planning law firm.