With the election looming and year-end approaching, we are beginning to focus on tax planning, particularly estate tax. The estate tax credit (a federal gift and estate tax-free allowance of $11.58 million, double for married couples) is scheduled to expire at the end of 2025 unless the legislation is extended.
As we’re in an election year with the potential for a new administration, we feel it is important to review your estate tax plans now and consider making gifts this year to lock in the existing credit. There is a risk of the credit being cut next year should Biden win the election and gain control of Congress. According to a Reuters news article, “wealthy people are especially nervous that an exemption allowing individuals to leave up to $11.58 million to heirs, free of estate or gift taxes, could be cut before it expires in 2025.”
With a Biden win, there was an expectation that the estate tax and gift tax exemption would be cut in half by 2021, however, the revised outlook is that it would return to the “historic norm” seen in the 2009 exemption rate of $3.5 million ($7 million for married couples) at a tax rate of 45% (versus a rate of 40% today). Using this assumption, if a married couple didn’t lock in the full exemption before the rate change, they would have to pay an additional $7.2 million of estate tax at the time of death.
Biden’s tax plan also proposes to eliminate basis step-up at death. Currently, for federal income tax purposes, the basis of inherited property is “stepped-up” to the property’s fair market value on the decedent’s date of death, effectively eliminating all capital gains on the pre-death appreciation. Biden has endorsed eliminating this benefit, however, it is unclear whether his proposal is to impose a tax on unrealized appreciation at the decedent’s death or to simply eliminate the basis step-up, so that inherited property would retain the basis that it had in the hands of the decedent. This could significantly increase capital gains tax liability to your heirs.
For example, if you purchased stock in a company several years ago for $50,000 and at the time of your death, it was worth $1 million, under the existing law the basis for your heirs is stepped-up to the $1 million value without any tax liability. When your heirs sell the stock, they would only be liable for the gains made on the appreciation over the $1 million value. What Biden’s tax plan is proposing is to eliminate the basis step-up, which means your heirs would be liable for capital gains on $950k.
With an uncertain election outcome, we highly recommend you review your tax planning and take steps to protect your wealth. If you have questions or need help, please get in touch with one of the lawyers below:
Allan Rooney
Founding Partner – New York
+1 212 545 8022
allan.rooney@rooneynimmo.com
Tim Davis
Partner – New York
+1 212 545 8022
tim.davis@rooneynimmo.com
This article is one of a series intended to de-mystify common legal issues for the non-lawyer and entrepreneur audience – they are designed to foster discussion and is by no means exhaustive. These materials are for informational purposes only. Nothing herein is intended nor should be regarded as legal advice. The distribution of this article to any person does not establish an attorney-client relationship with our firm. Rooney Nimmo assumes no liability in connection with the use of this publication. This bulletin is considered attorney advertising under the applicable rules of New York state. Rooney Nimmo UK is regulated by the Law Society of Scotland and Rooney Nimmo US by the New York rules of professional conduct. All attorneys and solicitors listed in this firm stipulate their jurisdictional limitations. Rooney Nimmo in the USA is a law firm registered as a New York State professional corporation.
