How Biden's New Proposed Tax Plan Affects Estate Planning


Biden Administration conference discussing capital gains and step up in basis rules.
Bay area estate planning attorney discusses the President's tax plan unveiled this week.

This week (on April 28, 2001) President Joe Biden announced a tax package (referred to as the American Families Plan) which did not include provisions to expand federal estate and gift taxes beyond the current $11.7 million exclusion as he'd proposed during his campaign. It did, however, include provisions for an end to the long standing “step-up in basis rule,” as well as taxing unrealized capital gains at death and a near doubling of the capital gains tax rate for the wealthy.


Estate and Gift Tax Increases are Not the Priority (for Now)


During his 2020 campaign, Biden proposed to increase the estate tax by lowering a taxpayer’s federal estate tax exemption from the current $11.7 million amount to as low as $3.5 million, as well to increase the estate and gift tax rate from the current 40 percent rate to 45 percent, in order to force the wealthy to pay a greater share of federal revenue.


Despite the campaign rhetoric, however, no such estate and gift tax revisions appeared in the President’s plan proposed this week. According to Bloomberg, those “familiar with the discussions” indicated that the White House decided the plan’s proposed changes affecting capital gains taxation (discussed below) are dramatic enough to warrant excluding an estate tax hike on top of it.


The absence of any currently proposed estate and gift tax changes does not mean that such changes won't resurface later on. Many leading Democrats still seek to expand the estate and gift tax system as a means to tax inherited wealth. Moreover, the current $11.7 million estate and gift tax exemption is set to expire at the end of 2025, meaning the currently high threshold will automatically step down to $5 million per person (adjusted for inflation – meaning the actual number may be more like $6 million to $7 million) come January 1, 2026 if Congress does not act before then.


Major Proposed Changes Affecting Capital Gains


Although the estate and gift tax is being left alone for the time being, Biden’s plan proposes a major overhaul of capital gains taxation that affects estate planning considerably, most notably:

  • Taxing unrealized capital gains on assets when someone dies (subject to a $1 million exemption);

  • Eliminating the “step-up in basis” on inherited assets; and

  • Nearly doubling the top capital gains tax rate

Under current law, heirs of an inherited asset that has appreciated in value since it was originally acquired do not have to pay taxes on “unrealized” capital gains. Instead, those gains are only taxable if and when an asset is sold (which is when the gain is considered “realized”). Moreover, because most assets receive what is called a “step-up in basis” at the owner’s death, appreciation that occurred during the original owner’s lifetime is wiped out from taxation when it is later sold. That is because the step-up in basis rule allows the new owners to use the market value of inherited assets at the time of inheritance (rather than the original owner’s purchase price of an asset) as the cost basis for calculating capital gain when an asset is sold.


That would all change under Biden’s plan as proposed, which would eliminate the step-up in basis and tax unrealized capital gains at the owner’s death, subject to a $1 million exemption per person. The proposed top marginal tax rate is 39.6 percent. After adding in a 3.8 percent net investment income tax (NIIT), the combined top tax rate on capital gains would amount to 43.4 percent, compared to 23.8 percent today.


The plan will likely change as it moves through Congress. According to Kiplinger, the President faces an uphill battle with changing the stepped-up basis rule as well as his proposed income tax hikes. He shouldn’t expect any Republican support, and will likely face push back from moderate Democrats as well.


Where to go from Here


At this moment in time, it's wise to consider how these proposed changes may affect your heirs and your overall estate plan if they become the law. We're not sure how this will all play out yet; therefore, actions taken at this point would be largely speculative. That being said, having liquidity through assets such as life insurance is always a safe hedge against future taxes affecting our heirs. If other, more drastic moves (such as asset sales or lifetime gifts) are made now based solely on an anticipated change in the law, there is the risk that the proposed rules will not become the law, or, if the laws are passed, that they fail to become permanent and are repealed by a future administration. Therefore, any and all decisions ought to be made in that context.

252 views