As discussed in earlier articles, a number of tax proposals are being considered in Congress that could significantly affect gifting and estate plans. There are planning strategies to help protect your estate from future tax changes, so now is a good time to look at your estate plan and see if you need to make adjustments.
Under Vermont senator Bernie Sanders For the 99.5 Percent Act, the estate tax exemption would be reduced from $11.7 million for individuals and $23.4 million for couples to $3.5 million for individuals and $7 million for couples. Any estate that is valued at under the exemption amount will not pay any federal estate taxes, while those exceeding the exemption threshold would be subject to a progressively increasing tax rate that starts at 45 percent. The Act would also slash the lifetime gift tax exemption from $11.7 million to $1 million, although individuals would still be able to give away $15,000 a year without the gift counting toward the lifetime limit.
Another proposal in the Senate is the Sensible Tax and Equity Promotion (STEP) Act, which would eliminate the step-up in basis that beneficiaries receive when they inherit property. The proposal would require an estate to pay tax on all previously untaxed gains. This means that if an estate includes property that has increased in value, the estate would have to pay taxes on that increase. However, the Act would allow the first $1 million of appreciated assets to pass without taxation. In addition, families that inherit a farm or business would be able to pay the tax in installments over a 15-year period. Any taxes paid under the bill would be deductible from the estate tax.
President Biden has also introduced his tax proposals, which include an increase of the capital gains tax rate to 40 percent. This would apply only to income over $1 million. Biden’s proposal also contains a similar elimination of the step-up in basis as the STEP Act. In addition, the proposal targets dynasty trusts. The income that has appreciated in a dynasty trust may be subject to capital gains if it hasn’t been subject to recognition in the past 90 years. There would also be no valuation discounts when calculating capital gains.
It isn’t clear which if any of these proposals will make it all the way through Congress and get signed into law, but with Democrats in control of both houses of Congress and the presidency, some changes are likely.