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Planning for Possible Estate And Gift Tax Changes

Now that Democrats control both chambers of Congress and the White House, the Biden administration will be capable of making tax law changes under “budget reconciliation” procedures with a simple majority vote. Estate and gift tax changes proposed as part of Biden’s presidential campaign are likely to be considered in future legislation, although the timing and details are unknown. Below are the Biden administration’s proposals to estate and gift taxes and a few strategies to consider.

Biden’s Main Proposals

  • Decrease in the Lifetime Gift and Estate Tax Exemptions:

Current law: The 2021 estate and gift tax exemptions are currently $11.7 million per taxpayer, with asset values in excess of that amount taxed at 40% before passing to heirs. The exemptions are scheduled to sunset on December 31, 2025. Afterwards, the exemption decreases to $5 million per taxpayer (to be adjusted for inflation).

Biden’s proposal: The estate tax exemption will be reduced to $3.5 million per taxpayer and the lifetime gift tax exemption reduces to $1 million.  Amounts transferred in excess of these amounts will be taxed at 45%.

  • Elimination of the Basis “Step-Up” at Death:

Current law: The federal income tax basis of an inherited asset is the stepped-up fair market value as of the decedent’s date of death (or the value six months after the date of death if the Alternate Valuation Date is elected).

Biden’s proposal: Either the current step-up basis of the inherited assets will be eliminated; or death will be treated as a realization event and the unrealized appreciation in the decedent’s gross estate will be taxed at the applicable long-term capital gain rate.

Planning Strategies to Consider Before any Upcoming Changes

  • Most tax law changes are applied prospectively; however, it is possible for some changes to have a retroactive application. In this case, use a formula gift today to transfer assets to a trust. If there is a change to the lifetime gift exemption that has retroactive application, the trust will apply the formula to automatically adjust the gifted amount to the amount retroactively allowed under later legislative amendments; any excess interest in assets would revert to the donor’s spouse or to an incomplete gift trust if there is no spouse.
  • Consider an installment sale to an irrevocable grantor trust today to lock in the value of the transfer, assuming Congress will grandfather any grantor trusts in existence should they make changes to the grantor trust rules under future tax law.
  • Use a marital-type trust (like a QTIP) in 2021 to transfer assets to a U.S. citizen spouse and hold off on making the QTIP election to determine the amount to be treated as a gift versus a marital transfer later. The taxpayer has until October 15, 2022 to make the election, which is the extended due date of a 2021 gift tax return.

In view of these possible drastic changes in the transfer tax system, we are here to help you formulate strategies against any negative estate and gift tax impacts from tax reform.
For questions or more information, please contact Fei Zhao at fzhao@windes.com or 844.4WINDES (844.494.6337).

Fei Zhao
Fei Zhao, CPA, MST, TEP

Senior Manager, Tax

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