Potential Election Impacts to Estate and Gift Tax Planning

Each election year brings the potential of significant tax planning reform. Now that the election results are drawing to a close, it is time to analyze what key tax reforms could be imminent. President-elect Joe Biden has proposed drastic changes to wealth transfer taxation. Here are two major developments to be aware of:

1. Eliminating the Step-Up In Basis

President-elect Joe Biden has proposed eliminating the step-up in basis for inherited capital assets, which means more taxes on wealth passing to heirs. Under the current estate tax system, assets passing through an estate get a step-up in tax basis to the fair market value at the date of death. This eliminates all capital gains on predeath appreciation.

Example:  Currently, a $1,000,000 non-qualified investment account would get a step-up in tax basis to $1,000,000 and if beneficiaries liquidated this account at that time, there would be no capital gain taxes to be paid.  Under Biden’s plan, there would be no increase in cost basis at death and a taxable event when assets are sold by beneficiaries.  With Biden’s plan intact, a non-qualified investment account with a fair market value of $1MM, and a cost basis of $500,000 would have potential Federal income tax consequences of $119,000 when these assets are sold by the beneficiaries.  This would be a costly change to inheriting assets for all beneficiaries and burdensome to locate tax basis records on inherited assets as well.

2. Decreasing the Estate and Gift Tax Exemption

President-elect Joe Biden has also proposed reducing the estate tax exemption amount. As of now, you can transfer up to $11,580,000 per person during life or death without being subject to paying a federal estate or gift tax. A transfer larger than that exemption amount incurs a gift or estate tax rate of up to 40%. Biden has proposed lowering the estate tax exemption amount to pre-2018 levels, which would be $5,790,000 with future indexing for inflation.

Example: Imagine you were a landowner whose land currently had a market value of $10m and you have yet to use any of your gift tax exemption amount. If you gifted that land to your children this year, no federal gift tax would be due. If you gifted your land while under Biden’s proposed plan, you would owe around $1,680,000 in federal gift taxes (40% x ($10m – $5,790,000)).

A key thing to note is that all the above information is yet to be confirmed. These observations are simply based off campaign proposals that President-elect Joe Biden made on the trail. Whether or not they become official tax legislature is yet to be determined and would have to be passed by both the House and Senate and signed by the current President. With that in mind, it is still important to stay alert on potential tax reform so that you can be prepared for any future impacts.

As updates begin to develop surrounding these potential policy changes, we will continue to keep you informed on new findings. If you are curious how these proposals may impact you or your business, we are here to help. Contact your trusted advisor at BerganKDV or start here.

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