Potential Significant Changes to Estate Plan & Gift Tax Rules May Be on the Horizon

May 13, 2021 | Article

President Biden released his American Families Plan on April 28, 2021, introducing significant changes to the “stepped-up” tax basis available for assets held at death. Under current law, an heir receives assets at death with a tax basis equal to the fair market value. This increased tax basis is referred to as a “stepped-up” tax basis. If an heir decides to sell the asset when inherited, there generally would be no tax due because there would be no difference between the asset’s tax basis and its value.

There’s a lot of proposed legislation to think about. We’ve also broken down what the American Jobs Plan could mean for your financial plan.

What the Changes to the “Stepped-Up” Tax Basis Mean

Under President Biden’s American Families Plan, the “stepped-up” tax basis would be limited to gains of $1 million per person. There are exclusions for property donated to charity. There is also an exclusion for family-owned businesses and farms if the assets are given to an heir who continues to run the business or farm. However, it is unknown if there will be restrictions as to the number of years that the family heir must continue to run the business or farm.

Under current law, pay an estate tax when the assets of a decedent total more than the current estate tax exemption. There is no indication in the American Families Plan that the estate tax would end if the “stepped-up” tax basis is limited, meaning tax could be imposed twice. Currently, inherited property is “stepped-up” to fair market value for all taxpayers, whether or not they owe estate taxes.

A personal residence capital gain exclusion of up to $250,000 per person is still available if, after death, property continues to be a “personal residence” as defined under the Internal Revenue Code.. Also, upon death, the personal residence is included in the total of assets subject to the “stepped-up” basis limitation.

The 99.5 Percent Act

Legislation introduced by Senator Sanders on March 25, 2021, proposes other significant changes to the current federal estate and gift tax rules. Senator Sanders’ new legislation is entitled, “For The 99.5 Percent Act” (the “Act”), and it is separate and apart from the American Families Plan.

What’s Included in the 99.5 Percent Act?

The Act significantly reduces the federal estate and gift tax exemptions. It also eliminates, as early as the date of enactment, many common estate planning techniques for reducing the estate tax.

The estate tax exemption, under the Act, would move to $3,500,000, down from the current exemption of $11,700,000. The Act would also reduce the lifetime gift tax exemption to $1,000,000. Under the Act, the estate and gift tax rates, which currently top out at 40%, are also scheduled to increase to a range starting at 45% to a top rate of 65% for taxpayers with an estate greater than $1 billion.

Other key provisions of the Act include:

  • Limiting the annual gift exclusions for certain transfers in trust, passthroughs or other items that cannot be immediately liquidated by the donee
  • Estate inclusion and gift tax triggers related to certain grantor trust structures
  • 50-year statutory limit for generation-skipping trusts
  • Elimination of discounts on family investment entities, such as family limited partnerships and limited liability companies
  • Disallowance of select marketability and minority interest discounts
  • Requirement of grantor retained annuity trusts to have 10-year minimum term and a remainder interest equal to the greater of 25% of fair market value or $500,000

What Should You Do Now?

Considering the higher estate exemption available today and the ability to use some of the estate planning techniques that would be eliminated in the Act, now is the time to talk to your tax and wealth advisor to be sure you understand the tax and cash flow consequences of using your gift exemption during your life while the higher exemptions are available.


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