It appears that the historic Presidential election of 2020 is soon to be in the rear view mirror. Accordingly, it is time to assess the impact of President Elect Joseph Biden’s tax proposals on estate planning.
President Elect Biden has proposed reducing the current $11.58 million estate, gift and GST tax exemptions to as low as $3.5 million per person for estates and $1 million per person for lifetime gifts. The Biden proposal would also increase the estate and gift tax rate on transfers in excess of these tax exemptions from 40% to 45%. In addition, there would be an elimination of “stepped-up” basis of assets upon death in favor of fair market value of assets as of date of death, which would result in the elimination of all capital gains on appreciation of assets prior to death. Whether unrealized capital gains would be taxed at death through a deemed sale remains to be seen. There have also been discussions in recent years of limiting the use of common estate planning techniques such as short term grantor retained annuity trusts, intentionally defective grantor trusts and entity discount gifting.
Let’s take a closer look at President-Elect Biden’s Tax Plan:
- Individual Income. Increases top income tax rate to 39.6% for taxable incomes over $400,000. Supports a cap on itemized deductions at 28% and would restore the state and local deduction for amounts above the $10,000 cap that is currently in place. Supports a tax credit of $3,000 for family caregivers. Supports an increase in the child tax credit for 2021 to $3,000 per child for children ages 6 to 17 and $3,600 for children under 6. Supports cancelling student loans, tax-free after borrowers have been enrolled in the income-based repayment plan for 20 years.
- Capital Gains Tax Increase. Includes taxing capital gains at ordinary income rates for taxpayers with over $1,000,000 of taxable income. This would result in a roughly 19% tax increase on capital gains for taxpayers with taxable incomes over $1,000,000.
- Financial Transaction Tax. Implements a financial transaction tax on equity and debt trades executed in the U.S. The details of this financial transaction tax have not been released as of yet, but it is likely that securities trades by tax-exempt retirement plans, e.g. 401K plans, would also be impacted by this tax.
- Social Security and Medicare. Supports eliminating the Social Security tax exemption for wages and self-employment income over $400,000. The exemption would still apply to wages and self-employment income between $137,700 and $400,000. This would result in a 12.4% tax on wages and self-employment income up to $137,700, exempt wages from this tax between $137,700 and $400,000, and then reimpose the 12.4% tax to wages and self-employment income over $400,000. Biden’s Plan also supports lowering the age of Medicare eligibility from 65 to 60.
- Estate and Gift Tax. Biden is proposing two major wealth tax increases. First, he would tax unrealized capital gains in estates for decedents who had earned more than $400,000 before death at the rate of 20% plus the Net Investment Income Tax of 3.8%. Second, he would increase the estate and gift tax rate from 40% to 45%. It is speculated that the exemption could be reduced to the 2009 level, which was $3,500,000. As an alternative to taxing the unrealized appreciation of capital assets at death, Biden is also considering the elimination of the step-up in basis at death for inherited assets. Elimination of the step-up in basis would result in income taxation to the beneficiaries of the decedent who subsequently sell those assets.
- Business Tax. Increases the corporate tax rate from 21% to 28% for taxable Corporations. For “pass-thru” entities, the Plan would consider a repeal of the 20% deduction for qualified business income that was implemented under the TCJA. There is also consideration of a 10% “Made in America” tax credit for companies that create jobs for American workers by revitalizing closed or nearly closed facilities, retooling or expanding facilities, and bringing production or services jobs back to America. This 10% tax credit will also apply when a company is increasing manufacturing wages above the pre-COVID baseline for jobs paying up to $100,000. President Elect Biden is also considering a new childcare construction tax credit to encourage businesses to build childcare facilities at places of work.
It is important to note that any changes to income, estate and gift tax laws require Congressional action from both branches – the make-up in the House and Senate are thus critical components to determining the adoption of any proposals into law. If the Democrats take control of the Senate, they would have unified control of the House, Senate, and Presidency. The two Georgia Senate seats will remain undetermined until early January, so we will not know the make-up of the Senate until after year-end. This uncertainty will make estate planning very difficult until those run-off elections are concluded. Given the fact that Democrats did not sweep the Senate, we do know that any tax law changes would need to be part of the Congressional “reconciliation” process, which requires only a simple majority (as opposed to the filibuster process, which would require a 60 vote majority). The reconciliation process may only be used three times a year (and, in practice, is usually only used once). However, it is possible (though less likely than most people believed prior to the election) that the reconciliation process could be used to repeal The 2017 Tax Cuts and Jobs Act (TCJA), in which case the gift, estate and GST tax exemption would decease to $5 million, as adjusted for inflation. It is also possible that new tax legislation passed at any time in 2021 could be made retroactive to January 1, 2021. Note that even if the Republicans hold the Senate, the 2022 election could turn the Senate to Democrat control, potentially leading to yet additional tax law changes.
Please direct any questions to Gunster’s Private Wealth Services practice group.
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This publication is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this publication.
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