Now that the election is over, what next? There is still a lot of uncertainty over the results and the effects that will follow. It appears that Joe Biden will be our next President, but the division of Congress is less clear. What can voters anticipate if President Joe Biden is elected, but the Congress remains divided by party? And how could this effect your estate planning?
What’s Been Promised and What to Expect — Gift and Estate Tax Plans
Most of the focus of the election was centered on the economy and taxes. It’s no secret the American economy has been struck hard by the COVID pandemic. Each candidate proposed plans on how to not only recover from the impact, but also how to thrive in our new COVID-including world. During the campaign, President Biden proposed an extensive plan to stimulate the economy through taxing and spending, while President’s Trump’s plan was much more conservative (and some would say illusive).
While most of the focus on President Biden’s tax plan focused on income tax reform, you may have heard of the proposed plan to allow the Tax Cut and Jobs Act of 2017 (TCJA) to “sundown” or expire in 2025 as outlined in the TCJA. One impact of the TCJA expiring would be the return of the “lifetime exemption” to 2012 amounts. But why should you care about that?
It is important to realize the lifetime exemption amount can impact your estate plan. It’s key to remember that taxes on money gifts and taxes on money left behind after you die are closely intertwined. The law right now allows people to make a gift of up to $15,000 per beneficiary per year without paying gift tax. This means, you could give each of your children, your siblings, your parents, your in laws, your co-workers, and all the neighbors on your block $15,000 a piece, and not pay gift tax on any of it!
But, if you give more than $15,000 to a single person, you either must pay gift tax on the amount, or you have to use part of your lifetime exemption. So, what is it? A lifetime exemption is a fixed amount each person may use either on (1) gifts during their lifetime, or (2) when they leave assets on their death. The amount of your lifetime exemption has changed over the years.
In 2011, Congress set the lifetime exemption for gift and estate tax at $5 million per person ($10 million for married couples). In 2017, this exemption was doubled and in 2020 the lifetime exemption is now $11.58 million per person ($23.16 million for married couples). Meaning, an individual could leave money to their beneficiaries and, so long as it was not more than their exempted amount, not a cent of estate tax would be due. Yet, this increase was only ever meant to be temporary without further action by Congress, and is set to expire at the end of 2025.
During the campaign, much was claimed about President Biden’s tax plan, and many journalists alleged he intended to reduce the amount of lifetime exemption to prior amounts of $3.5 – $5 million per person even before the 2025 TCJA sundown. While there is no official confirmation on President Biden’s plans for the lifetime exemption, remember he will need a united Congress behind him in order to accomplish his proposed tax goals.
Potentially painful capital gains
The other big estate tax issue was the Vice President’s plans to either reduce or eliminate the “step-up in basis” adjustment, which would affect potential capital gains on inherited assets. This blog has discussed the “step-up in basis” before, but to quickly refresh, a step-up in basis allows a beneficiary who inherits an asset which has gained value since it was originally purchased, to sell the asset and not be taxed on the capital gain.
For example, when using a Date of Death Basis, the value of an asset (like a house) is reset to the Fair Market Value on the date of the owner’s death. So, if the owner bought a house for $200,000 twenty years ago, and it increased in value to $800,000 on the day the owner dies, the house’s basis is stepped up to $800,000. If the inheritor (you) sells the house before it gains more value, you as the inheritor would have no taxable gain. Meaning, you would not have to pay taxes on the $600,000 gain, since the basis was stepped up from $200,000 to $800,000 on the owner’s death.
However, Vice President Biden’s proposed tax plan includes plans to curtail or even eliminate this step up in basis on death. Which means beneficiaries who inherited appreciated assets would pay taxed on any capital gains they made from the sale of those assets. So, if you inherit a house which has appreciated from $200,000 to $800,000 and then attempt to sell that house, you may be paying capital gains taxes on some or all of the $600,000 gain you made.
Before You Panic
While all this talk of increased taxes sounds like a perfect reason to panic, remember a President can easily be hamstrung if Congress opposes him. Many of us recall watching President Obama grapple with Congress over many of his own proposed policies. Meaning, even though we have a Democratic President and House of Representatives, unless the Democrats also take control of the Senate. much of these changes may not happen until 2025, if they happen at all.
What does it all mean? Right now, it means that there may be some changes in the days ahead, and that we all need to keep an eye on Washington D.C. as the run-off election in Georgia take place and, ultimately, our elected officials make these decisions. One thing you can do is consider reviewing your estate documents, if they have not been updated recently. Or, if you do not have an estate plan, now may be a good time to put together a plan. We encourage you to consider scheduling a meeting to either craft an estate plan or review an existing one. We are here to help you and your family be prepared under both the current laws and under and potential changes.
Give Us a Call
Nielsen Law PLLC provides family focused estate planning to individuals and families in Austin, Round Rock, Cedar Park, and the Central Texas area. For more information and to learn about our firm, please contact us.