Estate and tax changes under the Biden Administration

With Democrats now controlling the House and the Senate being equally divided (with Vice President Harris having the tie breaking vote), we can expect the Biden Administration will face a smoother effort in getting its tax agenda passed although to avoid the filibuster provisions, they will still need the cooperation of Republicans.  President -Biden discussed several tax changes during his campaign – individual and business income, payroll and transfer taxes – but for purposes of this piece our focus is on three main areas to watch:

1. Reduction in federal estate exemptions. You can expect to see federal tax exemptions decreased back to pre-tax reform levels – historical norms.  There is risk that estate tax exemption amounts could be reduced and the top gift and estate tax rate could be increased to 45%.  Consequently, your currently remaining gift tax exemption amount, not used before the end of year, might not only be lost but future gifts could be subject to a higher tax rate.
2. Applying retroactivity to changes. As various proposed changes are passed into law, effective dates need to be considered. With so many urgent issues in the hands of the new administration, and widely varied enactment processes for each, it seems more unlikely that tax law changes would apply retroactively to January 1, 2021.  In which case, changes would simple be effective as of the date of introduction. That said, there have been times in the past when Congress made mid-year changes that were retroactively applicable.  Notwithstanding this uncertainty, it is important for you to determine how the proposed tax changes might affect you and the necessary steps you should be considering now rather than later.
3. Eliminating “step-up” basis at death. Historically, for federal income tax purposes, the basis of inherited property is “stepped-up” to the property’s fair market value on the decedent’s date of death. Eliminating the basis “step-up,” translates into more taxes on wealth that is passed on to beneficiaries and the end of favorable tax rates on capital gains for anyone making over $1M.  It is unclear, however, whether Biden’s proposition is to impose an income tax on unrealized appreciation at the decedent’s death or to just eliminate the basis “step-up,” so that inherited property would retain the basis that it had when under the control of the decedent.  Should Congress eliminate “step-up” basis, it would involve an overly complex process, resulting in even longer periods of recordkeeping.

However, finding a way to pay for these tax breaks makes certain new (or going back to prior) taxes on the wealthy more attractive. Expansion of FICA taxes on wages up to $400,000 (from $137,000) and elimination of like-kind exchange deferral and the Section 199A deduction for taxpayers with income over $400,000 are just three examples.

While nobody can predict exactly if and when these and other changes will occur, our team of PRK Livengood attorneys are here to guide and prepare you for the possibilities.  We are available to brainstorm about your unique situation, address risks involved in making significant gifts this year, and answer any other questions.  We will continue to monitor and report back to you on these and other issues resulting in the new Biden Administration.

Please contact any one of our knowledgeable attorneys:  Wendy L. Allard, John F. Sherwood, Jr. or John J. White.