Estate Tax Planning in a Biden Presidency (part 1)
To begin with, let’s NOT talk politics! But reality is, we are in the process of changing administrations, and possibly a change of control of the Senate. The November election has raised the very real possibility that a new tax act will be proposed by the Biden administration and considered by Congress. Over the next four weeks, we will look at the Biden estate-tax proposals and what you should do about your estate planning.
Although President-Elect Biden’s campaign proposed amending the estate tax, the exact form of a proposal has not been finalized. In generalities, the Biden plan would change estate taxes in three areas as shown by this chart:
| Current Law | Biden Plan | |
|---|---|---|
| Tax rate | 40% | 45% or more |
| Exemption amount | ||
| Couple | $23.4 Million | $12 Million (approx.) |
| Individual | $11.7 Million | $6 Million (approx.) |
| Step up in basis | Yes | No |
(Biden’s Plan was on his campaign website, since scrubbed. I’ve read descriptions of the plan with different variants than those described above)
The rate, as high as 55% in 1997, was gradually dropped until it hit 35% in 2011 and increased in 2013 to 40% where is stands today. An increase in the tax rate to 45% seems serious, but since estate and gift taxes are collected only on amounts exceeding the exemption, the rate is not the most important since the rate is irrelevant if all of your assets are exempt. So, although increasing the rate may be disturbing, the much bigger issue is what is the exemption amount.
The current law offers a very generous exemption amount of $11.7 million. First, a bit of history. After a long period with a much lower exemption amount, during the Bill Clinton presidency, the exemption amount was slowly increased until it reached $2 million per person in 2006. President George W. Bush signed a tax act that increased the exemption over several years reaching $3.5 million per person in 2009. Then, President Obama signed a new tax bill in December 2010 increasing the exemption to $5 million per person, indexed for inflation. That amount slowly increased with inflation until President Trump’s tax act doubled the exemption, initially to slightly more than $11 million, with continued indexing for inflation. Therefore, as of January of 2021, the exemption now stands at $11.7 million.
The relevance of this history is that through multiple administrations, Republican and Democratic, the exemption amount has continued to rise. A radical decrease in the exemption amount could up-end millions of voters’ estate plans. The revenue from estate taxes is relatively small part of the Federal budget (.5% of total revenue in 2019), so raising the ire of millions for a small revenue gain is not a good political calculus. Accordingly, many predict that there will be no substantial reduction in the estate tax exemption. On the other hand, President Biden’s position may reflect that the era of increasing exemptions is over.
If the Biden Plan were enacted, the exemption would be halved (returned to Obama era limits), an individual with less than $6 million or a couple with less than $12 million still does not seriously need to consider estate tax planning. If your estate has more than the current exemption amount (>$24M for a couple) you should have already undertaken estate tax planning.
Who should consider doing something? If you are in the middle (an estate between $6 and $11 million per person or $12 to $22 million per couple), a change in law could convert your estate to taxability. So, should you do something now? We will address that issue next week.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, specific tax, legal or accounting advice. We can only give specific advice upon consulting directly with you and reviewing your exact situation.
