Last week, the White House released The American Families Plan, which includes some new details regarding the Biden administration’s proposed 2021 tax reform. The tax changes expected to be enacted this year will be substantial and far reaching and will include corporate, individual and capital gains tax rate increases, as well as estate and gift tax law changes. Below we focus on how the American Families Plan may impact estate and gift tax planning.
Expected Estate and Gift Tax Increases and Changes
The estate tax and lifetime gift tax exemptions are currently $11.7 million per person ($23.4 million in the aggregate for married couples) but is set to sunset at the end of 2025. Additionally, there is the $15,000 per donee gift tax exclusion ($30,000 if spouses make a joint gift). The current estate tax rate on amounts in excess of the exemption amounts is a flat 40 percent, and the tax basis in inherited assets is “stepped-up” to the fair market value upon the death of the decedent. The Biden team stated during the presidential campaign that it would seek an increase in the estate tax rate to 45 percent and to reduce the exemption amounts to their pre-TCJA levels. Some have proposed an even higher tax rate and a lower exemption amount ($3.5 million per person).
The American Families Plan omits (for now, anyway) the Biden campaign’s plan to raise the estate tax rate from 40 percent to 45 percent and lower the exemption from $11.7 million, and instead focuses on ending the so-called step-up in basis at death. Specifically, the American Families Plan states that it will end “the practice of stepping up the basis for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions)” and “mak[e] sure gains are taxed if the property is not donated to charity.” The American Families Plan states that the proposed reform “will be designed with protections so that family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business.” These proposals seem to contemplate capital gains taxes at death, in addition to the estate tax (presumably with an estate deduction for capital gains taxes paid), with a carry-over basis (instead of a capital gains tax) for assets used in certain family businesses and family farms.
The portability of exemption amounts between spouses is expected to continue, but many of the planning techniques (including, grantor trusts, GRATs, and valuation discounts obtained in related-party transactions) presently utilized by taxpayers may be curtailed or eliminated entirely. Treasury Secretary Janet Yellen has stated that elimination of the step-up in asset basis at death is a priority for the Biden administration. Most now believe that these changes will occur in legislation expected to be enacted this fall.
Notwithstanding the President’s American Families Plan, Congress currently has before it proposed legislation that could still reduce the estate tax exemption down to $3.5 million, and the lifetime gift tax exemption down to $1.0 million. Thus, it’s unclear whether Congress will follow the President’s lead and leave the exemption amounts unchanged for the time being or move independently. Conventional wisdom seems to be that Congress does not have the necessary votes and will therefore follow the President as laid out in his American Families Plan.
Expected Timing of Biden Administration Tax Changes
Congressional committees in the House and Senate are already working on tax and budget proposals that will become part of the next budget reconciliation bill. The House and then the Senate will craft and approve a budget resolution to serve as the vehicle for the reconciliation process. Most expect committee action to begin in early May, with ultimate enactment of a comprehensive, single package in the fall. Only 51 votes are needed to pass budget reconciliation legislation in the Senate. The effective dates of the newly enacted provisions generally are expected to be Jan. 1, 2022, but certain provisions may have proposed effective dates tied to committee action or the date of enactment (for example, capital gains tax rate increases may be proposed to apply to sales occurring after the date of congressional committee action or the date of enactment of the legislation later in the fall). The effective dates of certain provisions may be phased in over time, and certain provisions may be enacted on a temporary basis to help keep the scored cost of the legislation within acceptable parameters.