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Thinking about leaving your wealth behind? Well, think again!

Kevin Wong, Principal, Citrin Cooperman Advisors LLC / Berdon Advisors LLC

02.22.21 | T&E Chat

With Joe Biden as president and the Democrats in control of both chambers of Congress, we should expect changes coming to the federal tax law. President Biden has promised a progressive approach to taxation throughout his campaign and is poised to follow through with that promise. Not only will this likely mean higher income taxes for businesses and high-income individuals, taxpayers can also expect higher gift and estate taxes as well.

Gift and Estate Taxes Under the TCJA

Prior to the Tax Cuts and Jobs Act (TCJA), the combined lifetime gift and estate exemption was set at $5 million in 2011 and adjusted for inflation each year thereafter. Former President Trump signed the TCJA in December 2017 and it took effect starting in 2018. The TCJA effectively doubled the lifetime exemption in 2017 of $5.49 million to $11.18 million in 2018. For married couples, this meant a total combined lifetime exemption amount of $22.36 million. The lifetime exemption currently stands at $11.7 million for individuals and $23.4 million for married couples in 2021. The TCJA also kept the top gift and estate tax rate at 40%. The doubling of the exemption is currently set to expire after 2025.

President Biden’s Proposed Gift and Estate Tax Plan

President Biden’s proposal may create a two-tranche system similar to the days of the old. His proposal would create a lifetime gift exemption of $1 million and an estate exemption of $3.5 million, down from the current combined exemption of $11.7 million. He is also looking to increase the top tax gift and estate tax bracket to 45% from its current rate of 40%.

President Biden is also proposing to eliminate the “step-up” in basis on appreciated assets. Currently when a decedent dies, his or her assets would receive a step-up in basis to the current fair market value when inherited by his or her beneficiaries. The beneficiaries can then turn around and sell the appreciated asset while recognizing little to no taxable gain.

However, by doing away with the step-up in basis, this could lead to two scenarios. 1) The decedent’s estate would value the assets at fair market value at the time of death and pay capital gains tax on this increase and the decedents will inherit the assets at fair market value; or 2) the beneficiaries will inherit the assets with the decedent’s adjusted basis. In either case, there will be potential capital gains tax liability.

Review your Estate Plan

While these changes remain on the horizon, it is prudent to review your current estate plan. While the odds of any changes to the estate and gift tax regime being made retroactive to the beginning of 2021 are slim, the chance remains. Have a discussion with your trusted advisor about your estate plan and determine whether making gifts sooner rather than later might make sense for your circumstances. Potential tax law changes are not the only reason to review your estate plan. Any sort of life changes such as marriage, divorce, birth, or adoption of a child, warrants a review of your estate plan.

Questions? I can be reached at 212.331.7441 | kewong@berdon.com or contact your Berdon advisor

Kevin Wong is a Tax Manager in the Personal Wealth Services Group of Berdon with nearly 10 years of professional experience. He works closely with high net worth individuals on matters involving their personal income tax, family businesses, and fiduciary, gift and estate taxes.

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