Biden Administration Plan Influences on Your Estate Planning
With control of both houses of Congress and a Democrat for President, the Biden administration has been aggressive in proposing new legislation, particularly in the area of taxationi. When it comes to your estate planning strategies, whether in place now or planned, a close watch of current Biden initiatives is critical.
Biden’s Estate, Gift, and Generation-Skipping Transfer (GST) Tax Plan
These bullet points highlight the major changes proposed in the Biden Estate, Gift, and Generation-Skipping Tax Plan:
- Options for decreasing the estate tax exemption:
- Decrease to $5 million for an individual ($10 million for a married couple), possibly indexed for inflation, possibly not, or
- Decrease to pre-Tax Cuts and Jobs Act amount of $3.5 million for an individual ($7 million for a married couple)
- Those options could be coupled with a top tax rate increase to 45%.
- May repeal the stepped-up basis for assets at death
- May tax unrealized capital gains at death at the proposed increased capital gains tax rates
That is a lot to consider, and some, all, or none of the proposals may end up law.
How Likely are These Proposals to be Enacted?
With the Democrats controlling both houses of Congress, they have a possibility of enactment of some or all the proposals. However, there are some Congressional procedures that must be considered before that happens.
- In the Senate, subject to some exceptions, rules require 60 votes to avoid a filibuster, which would delay or block action on the proposals. The Democrats only control 50 seats in the Senate, so they would need some Republican support.
- There could be a repeal of the filibuster rule, but it is considered unlikely.
- The “budget reconciliation” process could be used. If the Democrats can manage to use this process, a simple majority vote in the Senate would result in action.
Budget reconciliation to get these proposals enacted is possible, but it would require the entire Democratic caucus to vote in favor, which is not guaranteed.
Prospective or Retroactive?
While some high net worth individuals are considering estate actions in 2021 to use more or all their remaining estate, gift and GST tax exemptions before these amounts are reduced, it could be a mistake. While most tax legislation is prospective, which would probably make the effective date of enaction the beginning of 2022, that is not guaranteed. The effective date could be retroactive to January 1, 2021 or the date of enactment of the legislation.
Should the legislation be retroactive, anyone who took early action could be subject to a large amount of gift tax. There is not legal precedent for challenging this type of situation, and technically it seems to be legal and constitutional.
The cautious approach would be to consult with estate planning professionals before taking action in the area of gifting for tax reasons. There may certain strategies that could unwind estate planning actions to avoid unintended gift or GST taxes.
Before acting, explore all alternatives with tax and estate planning professionals. There is not absolute agreement among Democrats on other issues, so caution before action is important.