Though Election Day is over, we still have incredible uncertainty as to what 2021 will bring. If Joe Biden takes control of the White House, one of the many outcomes may be a substantial change to the current gift and estate tax laws.
Current Estate Laws
- The 2020 exclusion from paying gift or estate tax is $11.58 million per person, which means a married couple can shelter as much as $23.16 million from the 40% estate tax. Note: Barring any tax legislation, the exclusion amount will revert to $5 million (indexed for inflation) at the end of 2025.
- Beneficiaries of estates currently receive a step-up based on assets owned by a decedent at death. A step-up in basis is an adjustment of an asset’s value from cost to fair market value at the date of the decedent’s death.
Biden Tax Platform
- Joe Biden’s proposed tax platform reduces the exclusion from $11.58 million to $3.5 million per person and increases the estate tax to 45%.
- The platform eliminates the step-up in tax basis upon death.
A Biden presidency and a Democrat-controlled Senate would mean this tax platform could become effective as soon as January 1, 2021. Taxpayers who may have taxable estates should consider additional year-end gifts to take advantage of the existing $11.58 million exclusion. Furthermore, since Mr. Biden plans to eliminate basis step-up at death and remove capital gains tax for high-income earners, some taxpayers may consider selling highly appreciated assets by the end of the year to take advantage of the current 20% capital gains tax rate.
A Quick Note about Charitable Donations
Lastly, as you finalize your year-end planning, note the changes the CARES Act had on charitable contributions in 2020. The CARES Act allows individuals to deduct 100% of their charitable gifts against adjusted gross income during 2020. In 2021, charitable contributions will be limited to 60% of adjusted gross income, making 2020 advantageous to donate.
There is certainly not a “one-size-fits-all” approach to estate planning. To help you navigate these changes’ potential impact, a member of our team will reach out to discuss your options with you. To be clear, no action may be the best decision for you. Nonetheless, we want to ensure you understand the impact of a possible estate tax overhaul.