Right now, not many estates are subject to federal estate tax with the 2021 federal estate/gift exclusion being $11.7M per person or $23.4M per couple. That high exclusion level can be used for gifts during life or to apply against your estate at death. That could all be coming to an end soon. Not only has Biden proposed estate tax changes, but some senators have also come out with bills to change the estate tax law. Let’s take a look.
President Biden’s “American Families Plan”
Besides income tax changes, Biden’s plan would eliminate “step-up in basis” for gains in excess of $1M ($2.5M per couple when combined with the existing primary residence gain exclusion) and tax those unrealized gains at death if the property isn’t donated to charity. He intends for family-owned businesses and farms to be excluded for estates passing it to heirs who continue to run the business or farm.
Biden originally planned to reduce the federal estate exclusion back down either to the $5M pre-2017 tax law or to $3.5M with only $1M of that for lifetime gifting. Though he didn’t include that provision in his American Families Plan, he may be counting on others to propose that, as Senator Bernie Sanders had a couple of weeks earlier, and allow negotiations to pull it into law.
Senator Bernie Sanders’ “For the 99.5 Percent Act”
Key elements of the plan include:
- Bring back the 2009 estate exclusion of $3.5M and a $1M lifetime gift exclusion, for deaths after 12/31/21.
- Increase estate tax rates from the current 40 percent to a proposed 45 – 65 percent, depending on the size of the estate.
- Annual exclusion reduced to $10,000/year per donee but limited to $20k in total per year. Currently, you can give $15,000 to however many people you want each year.
- Include grantor trust assets in the grantor’s taxable estate and treat trust distributions to beneficiaries as gifts subject to gift tax, for any grantor trust created or receiving a contribution on or after the date of enactment of the Act. This could eliminate the intentionally defective grantor trust technique.
- Grantor Retained Annuity Trusts (GRATs) would be required to have a minimum term of 10 years and require the gift (remainder interest) to be at least 25 percent of the trust funding or $500,000, whichever is greater. This would eliminate the zeroed-out GRAT strategy.
- Valuation discounts would be limited for minority interests in nonbusiness entities, for any transfers after date of enactment.
Sensible Taxation and Equity Promotion (STEP) Act Proposed by Multiple Senators
Key elements of the plan include:
- Eliminates stepped-up basis at death by taxing unrealized gains exceeding $1M at death.
- The tax could be paid in installments over a 15-year period for illiquid assets such as businesses or farms.
Much can change between what is proposed and what is enacted, but the time to act is now to plan around and for potential estate tax law changes while you can. Reach out to our trusted experts today to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
