3 (more) Biden tax proposals: Understanding potential changes to gift and estate taxes
Learn how Joe Biden’s tax proposals could affect charitable planning
December 08, 2020 | by Nan Futrell ’07, Phillip Buchanan
In our first post, we considered the potential impact of several of President-elect Joe Biden’s proposed tax measures on charitable giving, focusing on proposals related to revenue earned by a taxpayer: income and capital gain taxes. Today’s post focuses on Biden’s proposals that signal changes to the taxes imposed when an individual transfers wealth to loved ones, whether as gifts during the owner’s lifetime or through their estate when they pass away – gift and estate taxes.
Biden Wealth Transfer Tax Proposal #1 -- Restore the estate tax exemption to 2009 levels
Whether a particular estate is subject to federal estate tax depends on a number of factors, including the number of deductions allowed – for example, deductions for property passing to survivor spouses or to qualified charities, like Duke. Most significantly, under federal (and sometimes state) law, only estates with combined gross assets above a certain value are subject to estate tax. The value of that exemption is set by Congress, and has fluctuated over time with the political tides. With the Tax Cut and Jobs Act of 2017, Congress significantly increased the estate tax exemption: for 2020, only estates exceeding $11.58 million per person (or $23.16 million per couple) are subject to the federal estate tax. The tax is levied on estates with assets above that exemption at a tax rate of 40%. Biden’s proposal would lower the estate tax exemption to $3.5 million per person ($7 million per couple) – a 70% decrease from 2020 levels – and raise the applicable tax rate to 45%.
Charitable Planning Impact: At current exemption levels, very few estates are subject to the federal estate tax. Decreasing the estate tax exemption would expose a higher percentage of estates to estate tax liability and incentivize charitable estate giving as a means of reducing estate tax liability. We should note that, without further congressional action, the increased exemption provided by the Tax Cut and Jobs Act will sunset in 2025, lowering the exemption significantly to an inflation-adjusted $5 million per person.
Biden Wealth Transfer Tax Proposal #2 -- Restore the lifetime gift tax exemption to 2009 levels
The federal gift tax applies to transfers of property by a person to a non-charitable recipient without receiving anything in return, whether or not the person transferring the property intends for it to be a gift. The current “lifetime gift tax exemption” mirrors the federal estate tax exemption levels; for 2020, annual gifts exceeding $15,000 (per recipient) directly reduce the gifter’s estate tax exemption available upon death, as well as their remaining gift tax exemption. Certain gifts are always exempt, such as charitable gifts and gifts to a spouse who is a U.S. citizen. Biden’s plan would reduce the non-charitable lifetime gift tax exemption to $1 million per individual ($2 million per couple).
Charitable Planning Impact: A significantly lower exemption for lifetime gifts would incentivize the use of gift planning vehicles like charitable lead trusts as a means of making unlimited/excludable lifetime gifts to charity, and subsequently transferring property to the donor’s heirs tax-free.
Biden Wealth Transfer Tax Proposal #3 -- Eliminate the “stepped-up cost basis at death” for capital gains on inherited property
Under current law, heirs of inherited property are not required to pay taxes on the appreciation of certain assets, such as real estate, stock and other securities that have built-up during the decedent’s lifetime. By leaving appreciated assets to heirs, decedents can effectively wipe away any capital gains tax they would otherwise owe upon selling most types of property, resetting the property’s “cost basis.” Cost basis generally refers to an asset’s purchase price and establishes the baseline for determining capital appreciation recognized by the purchaser over the period of their ownership. Heirs instead receive a “stepped-up” cost basis according to the fair market value of the property at the time of the owner’s death. Biden has proposed eliminating the stepped-up cost basis for inherited property, requiring heirs to pay taxes on capital gains based on the decedent’s cost basis in the inherited property.
Charitable Planning Impact: Practically speaking, eliminating the stepped-up cost basis for inherited property – a proposal the Wall Street Journal labeled a “radical change” – would face significant political and enforcement challenges. Nevertheless, if implemented, it could incentivize many taxpayers (not simply the uber-wealthy) to make charitable estate gifts using highly appreciated assets.