Joe Biden Elected President - Unsplash

Joe Biden Elected President - Unsplash

At the end of 2020, better known as ‘the year of unknowns’ thanks to the global pandemic, there was a lot of uncertainty about how the Biden administration’s policy changes would affect our estate planning for our clients and advisories on how to avoid new inheritance taxes.

Well, we can let you in on what has happened.

Navigating the road ahead in estate tax planning means surveying the landscape circumspectly. We have to look back to the previous administration’s accomplishments to know what the hot-button issues are in order to judge how far the goal-posts of normalcy have been moved.

A Bit of Background

Former President Trump & VP Mike Pence - Unsplash

Former President Trump & VP Mike Pence - Unsplash

In 2017, former President Trump enacted Tax Cuts and Jobs Act (TCJA) legislation that decreed and tax-free inheritance transfer ceiling of $11,580,000 per individual and a 40% tax rate above that exception.

This means that you could have transferred any amount up to that maximum to your heirs without incurring any expenses in estate tax. This would have continued up until January 1, 2026 when the ceiling would be dropped back down to $3,500,000, the previous exception window level.

In the run up to the election last year, there was a heightened anticipation and worrying concern for President Elect Biden’s plans to:

1.  Reduce the federal estate tax exemption rate to historical $3.5M levels immediately, and to…

2. Change the rules or possibly repeal the step-up basis in 2021.

That was then.

...we are remaining vigilant with an eye on expected changes for our clients in the increase of income tax and capital gains tax, and the possible repealing of the step-up in basis rules.

Today, President Biden has dug in and made changes to fund his $4 trillion plan through taxation on the wealthiest American individuals and corporations. But the good news is that Biden has not yet repealed the estate tax ceiling of Trump’s former administration, and while this has many breathing a sigh of relief, we are remaining vigilant with an eye on expected changes for our clients in the increase of income tax and capital gains tax, and the possible repealing of the step-up in basis rules. Those could be just around the corner if his campaign promises are to be believed.

Washington Capital building.

Income tax proposed changes:

  • Income tax rate increases from 37% to 39.6%

Practically speaking, you take home 2.5 % less than last year due to taxation, but when you think about it, it actually doubles down on the current rate of inflation at 2.4% for a total of almost 5% of your earnings that evaporate before hitting your hand.

Capital gains proposed changes:

  • Increased tax rate for individuals making plus $1M or couples making plus $2.5M, from 23.8% to a whopping 39.6%

Often capital assets are valued higher that you might expect, you can be sitting on more wealth than you think, where government taxation is concerned. Once your asset total reaches more than $1M, you will pay almost 40% of it to the government instead of 25%. That is a huge jump in anyone’s books, especially to entrepreneurs who for example own a couple of vehicles in the management of a small restaurant supply business. This number means almost half of what you have is no longer yours free and clear and you will pay on the realization of that capital in to cash as a sale, also greatly reducing your life-long earnings.

Downtown New York, New York State

Step-up in basis proposed changes:

  • Eliminating the step-up altogether meaning there’s not exemption from capital gains tax on inherited assets

This means it will require you to price the inherited item at market value instead of your actual sale value and this ends up in diminished returns for the one inheriting, reducing a family’s wealth generation by generation simply as a matter of taxation.

*While a couple of the tax changes we’ve mentioned are not yet codified into law, we are keeping an eye on it for you and can interpret what is happening and how it will affect you specifically.

Give us a call at Gavenda Law today if you have concerns about your estate setup and would like to protect your lifetime gifts for your beneficiaries. There are significant changes coming that must be considered in your ongoing estate management and estate planning if you are to remain confident and worry-free about the future. Contact us to help you navigate the fast-moving changes and work with you to get a clear picture of your assets and protect your wealth for your family’s next generation.

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