The electoral college voted earlier this month and Joe Biden is now the elected president.
One thing we know for sure is that the 2020 elections and their aftermath guarantee pretty much substantial changes in tax law. Although it is still unknown, we can glean important details from the rhetoric of the Biden campaign to prepare for the future.
Here’s what we know so far about Biden’s proposals that affect estate planning:
Estate, Gift and Generational Transfer Tax
Inheritance and gift tax exemptions for 2020 are $ 11.58 million (per taxpayer), with assets in excess of that amount being taxed at 40% before being passed on to your heirs. This exemption amount is slated to decrease to $ 5 million (per taxpayer) by the end of 2025. We know this under current law.
During Biden’s campaign, he advocated laws that reduce both estate and GST tax exemptions to $ 3.5 million (per taxpayer) and lifelong gift tax exemptions to $ 1 million (per taxpayer) would.
He also discussed additional legislative proposals to limit annual and aggregate donation limits for gifts to certain irrevocable trusts and family limited partnerships. This would undoubtedly affect our advanced planning tools, so time is of the essence.
Get your forward planning done now and make sure your planning is done before the changes.
In addition, numerous proposals for democratic tax reform propose to reset the estate tax rates to historical norms. What does that mean exactly? Well, in the 1940s the highest estate tax rate was 77%, and under the 2001 federal tax law, the tax rates were 45-55%.
We expect an upward revision in estate and gift tax rates. The good news is that our customers who committed to advanced planning before these changes are safe.
Remember that paying estate tax is a choice as it can be easily planned if you commit to planning ahead!
Capital gains taxes
Current law taxes capital gains at regular income tax rates if those gains are made on real estate held for less than a year. Long-term capital gains (ie gains on real estate held for more than a year) have a graduated tax rate that depends on the taxpayer’s income level (0%, 15% or 20%).
An additional 3.8% surcharge will be added to their investment income tax rate for individuals and couples earning more than $ 200,000 or $ 250,000 in net investment income per year.
Current tax law also allows for an increase in the valued property base upon the death of a property owner. This allows heirs who inherit property to sell the property shortly after the owner’s death with little or no capital gains tax on the sale of the inherited property.
Current law also allows a similar exchange about valued properties such as real estate and works of art. This allows taxpayers to reinvest the profits from valued properties in similar types of property without incurring capital gains tax on the sale of the property.
If the taxpayer continues to make similar exchanges for valued property until his death, the capital gains made on that property will be eliminated by increasing the base rules.
Under a Biden presidency, the tightening of the basic rules would either be removed or the recognition of capital gains would be required upon the death of every taxpayer. Additionally, Biden’s tax proposal eliminates similar exchanges and provides a long-term capital gains tax rate of 39.6% for individuals who earn more than $ 1 million per year. With the additional tax of 3.8% on the investment result, the effective federal tax rate for long-term capital gains for high earners would exceed 43%.
This means that in many taxpayer estates, the tax burden on capital gains after death could increase significantly.
There are still some specific steps you can take to prepare while you wait for the changes to come. There are solid advanced estate planning strategies out there that can help preserve a family legacy and protect the next generation from estate taxes.
Additionally, while disinheriting the IRS, you can protect your children from future decisions.
Taxes are certainly important, but they shouldn’t overshadow the need to get your personal affairs in order in the event of disability or death. Remember, none of us can get out of here alive. Consequently, your personal and spiritual affairs are invaluable.
If you haven’t started planning yet, or 3 years have passed since your estate plan was reviewed, now is the time to do it.
Randall Borkus is president of the Borkus Law Group, a law firm specializing in tax law, estate planning, and corporate and succession planning with offices in Oak Brook, Illinois and Williston.