Biden's Tax Plan, Part II: Navigate Future Estate Tax Changes

President Biden’s purported tax plan promises sweeping reform, some of which was discussed in Part I of this Filbrandt Report. Part II here will focus on tax changes that will have a longer-lasting impact for you, and more specifically, your heirs: lowering the estate tax exemption limit and eliminating what is called the “step-up in basis” at death.

Estate Tax Exemption

The current federal estate tax exemption limit is $11.7 million for each decedent, and through a process called “portability” that will not be discussed here, is $23.4 million for married couples. Such a lofty amount results in very few Americans being subject to estate taxes. The proposed tax legislation drops the tax limit from $11.7 million to $3.5 million per individual ($7 million per couple). While this still represents a relatively small subset of Americans subject to this tax, it is a significant increase for the wealthy few. Additionally, under President Biden’s proposal, the highest marginal estate tax rate would increase from 40% to 45%. Raising the marginal tax rate combined with decreasing the exemption limit means a higher tax rate on more estates.

To avoid hitting your heirs with hefty taxes, take advantage of the currently favorable tax climate and higher exemption by giving now. Giving prior to your death has the added benefit of seeing your hard work make an incredible impact on your loved ones firsthand. Any assets you give to an individual in excess of $15,000 per year begins to diminish your estate tax exemption available upon your death by using part of your cumulative lifetime exclusion immediately. To ensure you properly structure a gifting plan under the current or the newly proposed legislation, consult with your CERTIFIED FINANCIAL PLANNER™.

Stepped-Up Basis

The second part of the proposed estate tax changes is the elimination of the “step-up in basis” that occurs upon an individual’s death. Currently, when an individual dies, any assets they owned (e.g., home, personal property, investments, etc.) are “stepped-up;” the value of those assets is brought up to their current market value as opposed to their original purchase price. This step-up wipes away any capital gains that may have accumulated, allowing the beneficiary to inherit the assets without paying capital gains taxes. When leaving gifts for loved ones, this is the epitome of benefaction without the burden.

However, the proposed elimination of the step-up in basis would result in those gifts of assets being subject to capital gains taxation. There are two ways this could pan out: 1) your heirs would have to pay the capital gains taxes immediately upon your death, or 2) your heirs would be responsible for any capital gains taxes at the point they decide to sell the assets. If either of these situations play out, your heirs would receive a diminished inheritance due to the taxes they would be responsible for.

Both options could mean an unintended “inheritance” for your heirs—significant cost and headache! Thankfully, there are steps you can take to alleviate any potential burden.

Steps to Take Now

• Purchase life insurance. This pumps cash into your estate at the time of your death, helping to relieve some of the burden of the taxes due upon your passing. Without it, to pay the capital gains taxes your estate may need to sell assets that you would prefer to leave to your heirs.
• Keep a record of the cost basis of your assets. Save your heirs the time and effort of finding the information they may need to ensure that any taxes are administered in compliance with the potential new law.
• Realize gains during your lifetime. Work with your CERTIFIED FINANCIAL PLANNER™ to develop a tax plan to strategically realize gains during your lifetime, allowing the assets you pass on to have lower tax liability.

While it is not guaranteed any of the proposed tax changes will be passed into law, and certainly not immediately, the possibility is there. No matter the outcome, setting your estate up for the most favorable tax treatment is an important piece of your comprehensive financial plan. Our tax and financial planning experts are available to walk you through your options to find the best solutions for achieving your goals.

Related Articles

• To learn more about the New Administration's proposed tax changes, read this report: Biden's Tax Plan, Part I: Impacts on Federal Income Tax and Estate Tax

• To learn more about resilient investing and planning that gives you peace of mind, read this report: 3 Critical Steps to Weather an Economic Storm