With a change in the presidency comes changes in many areas of the law, including tax law. President Joe Biden’s plan is to reduce the current estate tax exemption to half of its current amount: back to $5 million per person, indexed for inflation. He may possibly call for a reduction as low as $3.5 million per person, depending on what is likely to pass through Congress. The current exemption is $11.58 million per person. What does this mean for you if the exemption is reduced?
If the law changes in 2021, for anyone who has not used their exemption up, they will lose anything over the new amount that is established in 2021. As the estate tax is 40% on any amounts over the exemption, this can mean paying millions more in estate tax, so it is critical for people with estates above $5 million, or married couples with estates over $10 million, to use up their exemption before the end of the year to preserve the tax savings that may be lost. A great way to use up the exemption is to gift the remaining exemption amount to a trust. This would preserve the current record high exemption and provide asset protection from creditors and divorces.
Some assets can be hard to value and would require an appraisal to prevent the IRS from being able to challenge the estimated value several years down the line. A method that would make using a hard-to-value asset possible for utilizing the current exemption amount is to gift assets that are easy to value, such as cash and marketable securities, in early 2021 that are the same value as the other asset and then swapping these assets out for the difficult to value one later on in 2021 after getting it appraised. This will result in no tax and will not jeopardize one’s exemption. Naturally, only certain trusts allow for this kind of asset swap and need to be drafted carefully in order to avoid unintended consequences.
President Biden also plans to eliminate the basis step-up. We have discussed this in a previous article, but put simply, instead of assets being valued at their date-of-death value and passing tax free, they will use their cost basis and any appreciation between the purchase and death must be noted. The problematic issue here is that finding out how much the decedent paid for an asset can be difficult, if not impossible. If the cost basis cannot be determined, it will be deemed zero, which is incredibly disadvantageous. This issue will be demanding to handle and will require skilled estate planners to navigate as a new challenge in the field.
Be sure to watch Stuart R. Morris's video on the topic of estate and tax planning under the Biden administration here.
If you would like more information or guidance on your estate planning, please contact us today at (561) 750-3850.