There is a presidential election looming over the horizon, and some changes are possible. As estate planning attorneys, we follow these events with interest, because a shift in the political winds can impact the federal estate tax and other relevant laws.
Federal Estate Tax Exclusion
Most people do not pay the federal estate tax because there is a credit or exclusion that is rather high. Prior to the 2016 presidential election, the exclusion was in the $5 million range. At the end of 2017, a piece of tax legislation was passed by Congress, and it was signed into law by the president.
During that year, the exact amount of the exclusion was $5.49 million. When this new tax act when into effect in 2018, it went up to $11.18 million. Since then, there have been adjustments on an annual basis to account for inflation. Right now in 2020, the exclusion is $11.58 million.
The maximum rate of the tax is 40 percent. This has been the rate since 2013, so it did not change when the 2017 tax bill was passed.
There is an estate tax marital deduction that allows you to transfer any amount of money to your spouse tax-free. The one caveat is the stipulation that your spouse would have to be an American citizen. Transfers to anyone else are subject to the tax.
While we are on the subject of spouses, you should be aware of the portability factor. A surviving spouse is allowed to utilize the exclusion that was allotted to their deceased spouse.
Federal Gift Tax
You cannot simply give large gifts to your loved ones while you are alive to sidestep the estate tax, because there is a federal gift tax in place. It is unified with the estate tax, so the exclusion is a unified exclusion that applies to lifetime gifts along with your estate.
At the time of this writing, Joe Biden has a double-digit lead in the polls. A number of Senate seats may turn blue as well, and this could give the Democrats a majority in both chambers of Congress.
If all that was to come to fruition, there could be changes in the estate tax parameters. Some of Biden’s contenders for the nomination were in favor of a so-called “wealth tax.” This is not part of Biden’s platform, but a reduction in the estate tax exclusion would serve a similar purpose.
One specific part of his stated platform does impact our field. At the present time, if you inherit assets that appreciated during the life of the decedent, you get a step-up in basis. For capital gains tax purposes, the present value would be the value of the assets when you inherited them.
Of course, if you continue to hold on to the assets, and they appreciate after you have acquired them, you would be responsible for those gains if and when they are realized.
Biden was in favor of the complete elimination of the step-up in basis. This would have a major impact on Americans that are transferring wealth in this manner.
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