Well, we thought by now we’d know who would be in Washington and influencing if not controlling tax policy for the next four years. If the Democrats gain control of the White House and both houses of Congress, it is likely that we will see higher taxes as well as a substantially reduced estate tax exemption amount. Reports have the estate tax exemption reducing from its current level of $11,580,000 (announced to rise to $11,700,000 in 2021) to $5,000,000 or even $3,500,000 if Congress would support Mr. Biden’s tax plans. Included in the exemption reduction plans is an increase in the estate tax rate to forty-five percent. In addition, Mr. Biden may change the law so that any appreciation inherent in the assets you own at your passing is taxable at your death, at a new long-term capital gains tax rate of 39.6%.
What would this mean for a husband and wife with an estate of $25,000,000? Under the current plan, each spouse would have an exemption of $11,580,000 or $23,160,000 collectively so only the excess of $1,840,000 would be subject to tax at 40% triggering $736,000 in estate tax at the death of the second spouse. In addition, all assets (other than retirement assets such as annuities and IRA’s) would get a new tax basis so if they needed to be liquidated to pay estate taxes, there would be no capital gains tax to pay.
Under the Biden plan, the same estate of $25,000,000 would only have a $7,000,000 exemption available so the net estate subject to tax would be $18,000,000 at 45% resulting in an $8,100,000 estate tax burden. In this example, the increase in estate tax from December 31, 2020 to January 1, 2021 would be $7,364,000.
In addition, the heirs in 2021 would be treated as having sold all of the estate’s assets at death triggering capital gains tax on the gain within the $25,000,000. Assuming $10,000,000 of inherent gain, that is an additional $3,960,000 of capital gains tax due. This causes the total increase in tax as a result of the Biden changes to be $11,324,000 on an estate of $25,000,000. For an average overall tax rate of 45.30%, excluding the effect of the net investment income tax of 3.8%.
Presently the result of the elections for certain Senate seats are not fully known. Therefore, it is not clear if the Democrats will have control of the Senate. We will not know the result of the Georgia runoffs until at least January, 2021, yet the new administration can enact laws that will be retroactive to January 1, 2021. It appears that many of the techniques available today to make use of the higher exemption will not be available in 2021. As a result, many of our clients are exploring how to structure their assets and planning to take advantage of the higher exemptions in 2020. Please contact us if we need to consult with you at this critical time.