President Biden’s Estate Tax and Capital Gains Tax Proposals

When President Biden revealed his latest tax proposals, he was, in many ways, picking the baton back up from his days as Vice President. In a 2015 State of the Union Address, President Obama discussed ending the “trust fund loophole,” as well as other issues related to estate planning and IRS inheritance tax rules. Although the name “trust fund loophole” is inaccurate, it refers to the step-up in tax basis under Internal Revenue Code Section 1014 for assets included in a descendant’s gross estate. President Biden’s proposals, which include raising taxes on the wealthiest Americans, would affect gift tax exemptions, estate tax rates, inheritance tax, and more.

Potential Cutback on Federal Estate & Gift Tax Exemption

Current lifetime estate and gift tax exemptions can total $11.7 million per person or up to $23.4 million per married couple. This means that individuals can leave $11.7 million (or $23.4 million for couples) to their descendants without paying any federal estate or gift taxes. Biden’s proposals are not guaranteed to become law, but his provisions would roll back these exemptions to their 2009 levels.

The proposed estate tax exemption could be lowered from $11.7 million to $3.5 million, and the lifetime gift tax exemption could be reduced from $11.7 million to $1 million per individual. However, it’s important to note that these changes only apply to the federal estate and gift tax exemptions. Many states institute their own rules, which means that there can be major disparities in the estate, gift, and inheritance tax rates by state.

Biden’s Estate Tax Increase

The Biden administration is proposing new estate tax laws seeking to increase the federal estate tax from 40% to 45%. If you have the means to meet your living expenses, you might consider gifting money now or utilizing the current lifetime exemption amount to transfer assets to trusts outside your estate, providing the best possible disbursement to your estate’s beneficiaries. As it stands, the current estate and gift tax exemptions are scheduled to sunset in 2025 — assuming no new law is passed — giving you little time to take advantage of the current exemptions.

Capital Gains Tax Increase

The president’s plan proposes limiting the use of 1031 exchanges and increasing the capital gains tax rate to 39.6% on individuals who earn more than $1 million per year. It would also eliminate the “step-up in basis” for inherited assets at death to the fair market value. Right now, heirs can avoid income taxes on gains accumulated before death, but Biden’s plan would mean that an asset holder’s death could trigger higher capital gains taxes on appreciated assets for beneficiaries.

Strategies to Avoid Taxes & Fees

Giving Gifts

Current IRS guidelines allow individuals to give up to $15,000 per year, per beneficiary. If your cash flow and savings allow it, you might consider gifting money sooner rather than later. This could help keep future appreciation and subsequent income out of your estate. If you are charitably inclined, there are additional strategies to consider. For example, a Merit advisor can walk you through charitable giving through avenues like a donor-advised fund. This strategy gives you immediate tax deductions while also allowing you to pick the charities to which you would like to donate.

Creating Trusts

Another option is creating a trust that benefits a spouse and other family members. One example is known as a Spousal Lifetime Access Trust (SLAT). This grantor trust allows one spouse to establish an irrevocable trust for the benefit of his or her partner. It also provides direct access to the beneficiary spouse and indirect access to a donor spouse. Since trusts require a great deal of planning and paperwork, a Merit financial adviser can answer any questions you have about Spousal Lifetime Access Trusts and trust tax rates.

Contact Merit Financial to Discuss Estate Planning

Merit Financial Group (“Merit”) is a hybrid SEC-Registered Investment Adviser based in Alpharetta, GA, with 18 additional offices throughout the country. As of December 31, 2020, Merit’s assets under management totaled over $4.84 billion ($2.97 billion in advisory plus $1.87 billion in brokerage assets), as well as $111 million in assets under advisement. Merit seeks to educate clients and establish and satisfy their financial goals, while also providing a community of Independent Advisor Partners through meaningful relationships, expanded capabilities, and synergies.

We hope you found this post on President Biden’s estate tax and capital gains tax proposals helpful! If you’d like more personalized financial advice or assistance with your estate planning, be sure to contact Merit Financial Advisors today!