| Baker, Burton & Lundy

BIDEN’S PROPOSED TAX PLAN

By Mary Korkodian


NOW MIGHT BE YOUR LAST CHANCE TO USE YOUR $11.7M GIFT TAX EXEMPTION

The current unified estate and gift tax exemption is at a historically high level. With Biden elected to the Presidency and Democrats now controlling both houses of Congress, many are thinking about how Biden’s tax reform proposals could impact them and their children if they are signed into law. For single people with an estate valued at over $10 million and for married couples with an estate valued at over $20 million, transferring assets now to your children could save millions of dollars in estate taxes. 1


What is the Current Estate and Gift Tax Exemption?


As of January 2021, individuals have a unified $11.7 million estate and gift exemption. For married couples, the combined exemption is $23.4 million.

The exemption can be used during one’s lifetime (via the “gift tax exemption”), at one’s death (via the “estate tax exemption”), or a combination of both. 2


Transfers of assets that exceed the exemption amount are subject to a 40% tax. For example, if a married couple transfers $30 million of assets to their children, they will be subject to a tax of $2.64 million. ($30M minus $23.4M is $6.6M. $6.6M multiplied by 40% is $2.64M.)


How Does Biden Propose Changing the Estate and Gift Tax Laws?


If Congress makes no changes, then the estate and gift tax exemption will be reduced to 2017 levels of $5 million (adjusted for inflation) per person starting January 1, 2026. (That’s $10M for married couples.)

However, Biden has proposed reducing the exemption to 2009 levels, which are $3.5 million estate exemption and $1 million gift exemption. (If any lifetime gifts are made, that would reduce the $3.5 million available in estate tax exemption). Moreover, Biden has proposed increasing the flat rate from 40% to 45%.


As you can see, these changes are significant as it would drastically widen the pool of estates that would be subject to estate taxes.


When Will the New Estate Laws Take Effect?


Whether Congress makes the effective date of the reduced exemption levels sooner than 2026, increases the maximum tax rate, and/or reduces the exemption levels even further than the scheduled $5M, is anybody’s guess. However, we think it highly unlikely that they will make any laws retroactive. Accordingly, we believe there will be some warning; however, the warning may not be very far in advance of the effective date of any changes.

How Much Does Gifting Now Save on Taxes Down the Road?


Every situation is different, but planning now could easily save millions of dollars in taxes, especially when considering how much the assets you gift now will appreciate over time. Thus, the tax savings are not only based upon the value of the assets today, but also on the future appreciation of those assets.

For many estates, there are several mechanisms that can be employed that allow for transfers of more than the exemption amount without actually exceeding the exemption threshold. Consult with an attorney to discuss what strategies would work best for your particular situation.


Aside From Tax Savings, What Else Should I Consider Before I Gift Assets?

Meet with your financial planner to discuss your financial needs for the rest of your lifetime (e.g., mortgages, expenses, healthcare, etc) to determine how much, if anything, you are able or want to gift away. We do not advise significant gifting if it will result in your financial hardship.


Aside from financial issues, the human factors should also be considered. Is the recipient going to be negatively impacted? How so? Will the recipient lose incentive to achieve their own financial independence? Will the transfer of assets impact family dynamics and relationships?

Should I Gift Assets Now?


If your estate3 is quite substantial and gifting assets would still leave you in a comfortable financial position for the rest of your lifetime, you may want to consider taking advantage of the $11.7M gift tax exemption available now before it becomes a thing of the past.

  1. For those of you who do not have this type of wealth, beware of gifting appreciated property because it could have negative income tax consequences to the recipient. Consult with your accountant.
  2. For example, if a person transfers $6M of assets during his lifetime, he will have another $5.7M of exemption left to use after his death. (This is assuming, of course, that the estate and gift exemption is $11.7M at the time of both transfers.)
  3. By “estate”, include equity in all real property owned, stocks, cash accounts, 401ks, IRAs, pensions, annuities, commodities, life insurance policies, and valuable personal property.

Please Note: This document does not constitute legal advice. Please consult an attorney for legal advice on what to do in a particular situation.

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