Unpacking the Proposed Estate Tax Changes

In the past few weeks, it’s likely that you’ve seen attention-grabbing headlines like these: 
Wealthy may face up to 61% tax rate on inherited wealth under Biden plan
Biden’s estate tax changes will wipe out millions of small businesses
With lots of dialogue surrounding President Biden’s proposed changes, it’s worth taking a moment to unpack and understand what the proposal really means, and how it could possibly relate to you. Biden’s proposal, the “American Jobs Plan,” looks to invest $2.3 Trillion in infrastructure improvements, climate change initiatives and creating new jobs. These expenditures would be paid for by raising corporate taxes and estate/inheritance taxes. For the latter, the proposal outlines eliminating the basis step-up at death. Senator Bernie Sanders has also proposed a bill in the Senate restructuring the estate tax by lowering the exemption. Let’s look at what each of these mean. 

Restructuring the Estate Tax

Currently, the estate tax exemption is set at $11.7 Million per individual ($23.4 Million for a married couple). Simply put, anyone who passes away with less than $11.7 Million in assets avoids paying any federal estate tax. This exemption amount is historically high (by contrast, the exemption amount was as low as $675,000 as recently as 2001). The current high exemption is temporary, however, and absent any further action from Congress, is set to drop down to $5 Million in 2026. Bernie Sanders’ plan looks to not only accelerate that timeline, but also drop the exemption all the way down to $3.5 Million ($7 Million for a married couple). Naturally, this means that more individuals and families may need to consider further estate planning to mitigate the effects of this tax. 

Eliminating the Basis Step-Up

Under our current tax system, whenever an asset (such as a house or stock in a company) appreciates in value from its original cost (also known as basis), it is subject to a capital gains tax when it is sold. Should that asset be given away at death, however, the recipient receives it with a “market value basis,” and all of the potential tax on the gain disappears. To illustrate this, imagine a scenario where Angela bought a vacation home many years ago for $500,000, and it has grown in worth to $1,000,000. If she were to give the vacation home to her grandson Benson while she was still alive, and he were to sell it the next day, he would have to pay taxes on the $500,000 of gain. If Angela instead were to give the vacation home to Benson in her estate plan, and he were to sell it the next day, he would pay no capital gains tax, since his basis would be “stepped-up” to $1,000,000 dollars.Biden’s proposal looks to eliminate this “step-up” and make death a taxable event. Absent any exceptions in the final law, Benson from our example above would have to pay capital gains tax upon receiving the home. 


The most important thing to understand from all of this, however, is that these proposed plans are unlikely to pass as-is. Republican lawmakers have already signalled strong opposition, especially with regards to the planned increases in taxation. As the legal landscape evolves, I stand by my commitment to offer you the best legal services possible. I’ll be sure to keep you updated as Congress contemplates restructuring the estate tax. As always, feel free to reach out with any questions, or if I can help you in any way.
For further reading on the proposal, and its possible effects- https://www.forbes.com/advisor/investing/stepped-up-basis-biden-tax-plan/ https://www.jdsupra.com/legalnews/proposed-gift-and-estate-tax-changes-3117008/

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