Many people are concerned about what will happen to federal estate and gift taxes if former Vice President Joe Biden is elected. Of course, even if Biden wins and the Democrats control both the Senate and the House, it will likely be some time before changes are implemented.
Nevertheless, as we approach the end of the year, there is one tax planning strategy you should complete by December 31st, even if you’re not yet ready for a complete overhaul of your estate plan.
Background: The Unified Credit
After a variety of deductions are made from a person’s estate, the “taxable estate” is taxed at the rate specified by the Unified Estate and Gift Tax Schedule. The unified tax imposes the same rate of tax on gifts made by will as on gifts made during life.
The rates rise significantly for larger estates. For example, the rate increases from 18%, when the cumulative total of taxable estate and taxable gifts is under $10,000, to 40%, when the cumulative total is over $1 million. Biden has proposed raising these taxes to the “historical norm.”
However, tax credits result in an exclusion that is available to every estate. For 2020, this amount is $11.58 million.
Unless Congress acts, the current estate tax exemption of $11.58 million will expire in 2025 and revert to the pre-2018 exemption level of $5 million (adjusted for inflation).
Biden hasn’t specified what he’d like to do with this exemption, but many believe that he hopes to have the exclusion revert to 2018 levels well before 2025.
Stepped-Up Basis
Biden has indicated that he’d like to eliminate the current “step-up in basis” on inherited assets.
Here’s an example of what this means. Let’s say that you bought a painting by a local artist for $1,000. Since that time, the artist has become quite famous and that painting is now valued at $1 million.
Upon your death, you leave the painting to your children. Your “basis” was only $1,000 because that’s what you paid, but your children inherit the painting with a “stepped up basis,” which is the painting’s market value as of the date of your death.
As a result, your kids can sell the painting for $1 million without owing capital gains tax, but under Biden’s plan, the unrealized gain at death (here, $999,000) would be taxed at the time of transfer to your children, regardless of whether they sell the painting.
Making Tax-Free Gifts
Given the uncertainty of the future tax laws, we strongly recommend that you make “annual exclusion” gifts before year end. These gifts don’t count toward your exemption and can be up to $15,000 per person per year ($30,000 if your spouse joins in the gift).
Another reason to consider year-end gifting is that, in addition to the federal estate tax, nearly half the states have a state estate or inheritance tax. For example, in Oregon, the exemption from estate tax is only $1,000,000, and in Washington, it is $2,193,000.
Non-Tax Reasons to Update Your Estate Plan
If you die unexpectedly and your estate planning documents are out-of-date, confusing, or nonexistent, settling your estate is likely to be much more complicated and expensive.
Further, if you die without appropriate estate planning documents, your property may be distributed in accordance with state law rather than your wishes.
By planning now, you can ensure that your assets go to those you want to have them. You can also identify the people you’d like to handle your estate and to care for your children. You can arrange to have children receive your assets only after they reach a certain age and protect disability benefits for beneficiaries with special needs.
Advance directives and durable powers of attorney are important to help ensure your wishes are met if you’re incapacitated.
An advance directive is used to describe your desires with respect to life support and the like, as well as to appoint someone to make healthcare decisions for you if you cannot do it on your own.
A durable power of attorney allows you to appoint someone to act for you in non-healthcare situations when you’re incapacitated. For instance, you can appoint someone to handle your banking and manage your investments.
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Please feel free to contact us if you have questions about or need assistance with your estate planning. We have established safety procedures in light of the COVID-19 pandemic so that you can safely complete this important task.
You may also be interested in obtaining a copy of Estate Planning (in Plain English)®, written by members of this law firm and available through Amazon, Barnes and Noble, and Bookshop (an online bookstore that allows you to support your favorite independently owned bookshop).
