CLIENT ALERT – Changes to Estate Tax Rules May Be Looming

In his late April address to a joint session of Congress, and in various speeches thereafter, President Biden laid out many of his proposals for tax changes.

Of chief concern to our estate planning clients are potential changes to the federal estate tax, as well as other tax changes which could bear upon planning.

Many folks had braced for a possible reduction of the federal estate tax exemption.

As a result of the 2017 Tax Cuts and Jobs Act (the TCJA), the federal estate tax exemption jumped to $11.4 Million per individual and $22.58 Million per married couple.  This amount has increased for inflation and presently stands at $11.58 Million per individual and $23.16 Million per married couple.  This increased exemption is scheduled to sunset in 2026, at which time the exemption would reduce to $5.49 Million per individual and $10.98 Million per married couple.

Any changes to the estate tax exemption are especially consequential because the rate of the estate tax is 40% on any asset in excess of the exempt amount.  This is one of the highest tax rates in the tax code.

As we have previously reported, the District of Columbia has already reduced its federal estate tax exemption from $5 Million to $4 Million to help fund COVID-19 relief and budget shortfalls.

What now appears clear is that any accelerated reduction of the estate tax exemption appears to be off the table under the Biden tax plan.  It appears likely that the Biden Administration will take action by inaction, permitting the estate tax exemption to sunset to half its current amount automatically in 2026.

What appears more likely and perhaps more consequential to estate planning clients is a change to the tax code which presently allow for a “step-up” in the cost basis of an asset held by a deceased individual upon death.  This permits estate planning clients to pass on significant wealth to their heirs free of any capital gains tax on the appreciation of the asset during their lifetime.  We previously explained the capital gains “step up” principle in the context of the sale of the Baltimore Orioles.

Rather than reduce the estate tax exemption, it appears more likely that the Biden administration will limit the amount of wealth which can obtain the favorable “step-up” in cost basis and pass free of appreciation.  Early proposals have floated a $1 Million or $2 Million “safe harbor” of assets which can pass with a “step-up”.

We will closely monitor changes to the estate tax law and report any changes in our blog and our e-newsletter.