Biden's Gift and Estate Tax Plan

It appears we will be seeing more gift estate tax law changes in the next few months than we have in the past few decades.

The current estate tax exemption of 11.7 million is proposed to go down to 3.5 million. A couple may, by setting up two trusts, double the exemption, but the estate planning must be done before the first spouse dies.

The current estate tax rate of 40% will start at 45% and scale up to 65%. The current annual gift tax exclusion of $15,000 per person for as many people as you choose is proposed to be limited to $10,000 per person per year, limited to a total of $20,000. If you give more than the allotted amount you must report the gift and the IRS will subtract it from your 3.5 million exemption at death.

There is a proposal to eliminate the "stepped-up basis" on death (except on the first million of assets in the estate). Whereas capital gains tax was essentially eliminated at death by having the basis automatically changed to date of death value, they will now go back to what you paid for it plus, in the case of your house, what you added by way of capital improvements. Essentially, some of your capital gains may now be taxed at death.

What does all this mean? If your estate, including all retirement plans and any life insurance you own, either exceeds or you have reason to believe will exceed 3.5 million at death, then you will want to set up trusts now for you and your spouse. If you are single and may exceed the 3.5 million, or a couple that may exceed 7 million, then you may want to purchase life insurance to pay the estate tax. The life insurance should be owned by the children and the annual premium gifted to them, in order to keep the life insurance proceeds out of your estate. Formerly, we used Irrevocable Life Insurance Trusts for this purpose, but the proposed legislation takes those away too.

If you already have an estate plan, it may be time to have your plan reviewed to see what might be done to save taxes before these changes become law.