Significant changes to the estate and gift tax rules may be coming soon.
Currently, an individual can shelter up to $11,700,000 in assets from the estate tax upon death, while a married couple can potentially shelter double that amount. The gift tax exemption amounts are the same. These amounts are historically high and their days seem to be numbered.
The current estate tax exemption amount is a product of the Tax Cuts and Jobs Act of 2017 (the “TCJA”), which doubled the estate tax exemption amount. Previously, the estate tax exemption was $5,000,000 per person, indexed for inflation off a 2010 base year. The provisions of the TCJA are scheduled to expire at the end of 2025, however, the estate tax exemption amount will revert to the status quo prior to the enactment of the TCJA. Thus, even if Congress does nothing, the individual estate tax exemption amount will be cut in half beginning in 2026.
The Biden administration has its sights set on an even greater reduction in the estate tax exemption amount. Biden’s proposal is to reduce the estate tax exemption amount to $3,500,000 per person. Presumably, the exemption amount would be indexed for inflation, but this has not yet been finalized. The gift tax exemption would be reduced to $1,000,000 per person, which would prohibit wealthy individuals from giving away a large portion of their estate prior to death. Additionally, the estate tax rate, which is currently imposed at a flat 40% rate, could be increased to up to 55% on large estates.
Of greater importance to middle-class families may be the proposal to limit the “step-up” in the income tax basis of assets owned by a decedent at death. Currently, the income tax basis in property that is included in a decedent’s estate receives a new basis that is “stepped up” to the value of the property on the decedent’s date of death. Accordingly, if a decedent bought stock at $10/share and died when the stock was worth $100/share, the beneficiaries of the decedent’s estate would recognize no capital gain if they sold the property for $100 or less per share following the decedent’s death. This is because the tax basis in the stock would have stepped up to $100/share.
A plan has been proposed to limit the “step up” in basis to an aggregate $1,000,000 in unrealized gain. If enacted, this change would impact many middle-class families who currently are able to pass assets along at death that are not subject to the estate tax and which also receive an income tax basis “step up.”
A further effect of this change would be to increase the importance of maintaining good records that support the decedent’s basis in the property, since the date of death value will no longer necessarily become the new tax basis in the property.
As a result of the potential changes looming on the horizon, anyone with an estate valued at $3,500,000 or more should consider reviewing and possibly updating their estate plans. An experienced estate planning attorney can handle complex tax and estate issues and advise you on the best course of action moving forward.