2021 Estate Tax Advisory

Although President Biden has not yet attempted to overhaul the nation’s tax system, it is expected that his administration will soon attempt to make good on some of the tax policy reforms he proposed during the run up to the 2020 elections.  This advisory raises important considerations regarding how Biden’s tax reforms might negatively affect you and your current estate planning so that you can be prepared to take steps to minimize your tax obligations before any substantive or retroactive changes are passed.

Senator Bernie Sanders, chair of the senate budget committee, is not waiting for Biden’s lead. He recently introduced an estate tax bill, aimed at taxing the rich, that significantly lowers the federal exemption and imposes a progressive estate tax topping out at 65%.

While the Sander’s bill will face strong opposition and is unlikely to pass, there is little doubt that, over the next two years, we can expect ongoing attempts to increase tax revenue at the expense of corporations, highly compensated earners and high net worth individuals. As such, Johnson Fistel is issuing this tax advisory as a service to our valued clientele. Please be aware that this advisory is purely speculative and there is no way to accurately predict whether any of proposed tax reforms will be enacted. In addition, while we anticipate that the current administration will propose sweeping tax reform across the board (including income, property, corporate and capital gains taxes), this advisory mainly focuses on reviewing potential changes to the current estate and gift tax infrastructure.

Federal Estate/Gift Tax Exemption

In 2021, the lifetime federal estate/gift tax exemption was raised to $11.7M per person (or $23.4M per couple), meaning you can individually gift or bequeath almost $11.7M in assets before your estate or heirs would have to pay federal tax on the overage.

The Sanders bill would lower the federal exemption to $3.5M per person (or $7M per couple).  Under this scenario, without adequate planning, any individual estate with over $3.5M in assets would be subject to considerable tax exposure under the second phase of the Sander’s bill – the progressive estate tax.

Progressive Estate Tax

The Sanders bill includes the adoption of a progressive estate tax that would start at 45% for individual estates between $3.5M and $10M, and would rise as high as 65% for estates over $1B.  Thus, the potential federal estate tax burden on large estates would be enormous if the bill passes in its present form.

The Biden Plan

While he hasn’t publically indicated support for the Sander’s bill, President Biden has expressed a strong interest in decreasing the federal exemption from its current level. He has also supported increasing the top individual income tax rate to 45 percent. Further, Biden has suggested that he may attempt to repeal the stepped-up basis and tax unrealized capital gains (at newly elevated income tax rates) at death – meaning heirs may be subject to capital gains tax, in addition to estate tax, when they receive highly appreciated assets (like stock and real estate).  These proposed changes could radically alter the landscape of estate planning, and the heirs of wealthy individuals and families could face punitive tax exposure when receiving legacy gifts and inheritances.

So what is the likelihood that the Biden administration will be able to pass new tax legislation? With the Democrats controlling both houses, President Biden will face less rigorous challenges to potential tax reforms. It is important to note that, historically, the federal estate tax exemption has never decreased and all previous attempts to repeal the stepped-up death basis have failed. Nonetheless, anything is possible, particularly if the filibuster is repealed, which could reduce (and possibly eliminate) any congressional opposition to Biden’s plans.

Another important consideration is the effective date of Biden’s potential tax reforms. If Biden’s plan is implemented retroactively, the effective date could be backtracked to January 1, 2021. While a possibility, the effects of this retroactivity could be considered unfairly punitive since it deprives individuals and families the opportunity to plan accordingly.

A Good Time to Review Your Estate Plan

While we can only speculate on what might happen in the future with regard to Biden’s tax agenda, we can be fairly confident in predicting that changes are coming down the beltway.  Being aware of the negative impact that tax reforms could have on your estate can help you plan accordingly, respond quickly, and take appropriate and calculated measures when necessary.  Trust and estate planning is essential to protect the assets you have worked hard to build, and your estate might be able to avoid wasting millions of dollars on taxes with proper planning and proven strategies. The Estate Planning/Asset Protection Group at Johnson Fistel would be happy to help you build a comprehensive and integrated estate plan, and/or review your current plan and help make any changes required to provide you and your family with the highest level of protection and comfort in these uncertain times.

“Someone’s sitting in the shade today because someone planted a tree a long time ago.”   – Warren Buffet.