On April 28, 2021, President Biden announced his American Families Plan, which outlines his agenda for raising taxes on the wealthy.
Interestingly, unlike his tax proposals during his campaign, the American Families Plan does not propose reducing the Federal Estate Tax Exclusion amount (the amount before which an estate would owe Federal estate tax), which is $11.7 million per individual, and $23.4 million per married couple. During his campaign, he proposed reducing this exclusion amount to $3.5 million, which would have impacted a significant amount of US taxpayers.
What President Biden did propose, consistent with his proposals during his campaign is 1) raising income tax rates on those making over $400,000 annually from 37% to 39.6%; 2) taxing capital gains and dividends at the 39.6% ordinary income tax rate for those with incomes over $1 million, up from the current – 20% rate; and 3) eliminating the basis step-up at death for gains over $1 million (or $2.5 million for a married couple).
Obviously we cannot predict what, if anything, will actually pass and become law, but some experts believe the increase in the top tax rate will stand, and that capital gains rates will go up some, maybe 25% to 28%.
Many experts believe that the proposal to eliminate the step-up will not pass, but that the Federal estate tax exemption may be reduced. Regarding the Federal estate tax exemption potential reduction, it should also be pointed out that, even if it is not reduced during the Biden administration, these exemption amounts are set to revert to an inflation adjusted $5 million after 2025.
In terms of when the tax law would be effective, while January 1, 2021 is theoretically possible, since it is already June, it is much more likely that the tax law changes would be effective either upon enactment or January 1, 2022.
Therefore, there is a unique opportunity to make gifts now, in 2021, either in trust or outright, to take advantage of the historically high Federal estate tax exemptions, while they are still available. Additionally, there are estate planning techniques which may allow individuals to leverage the exemption using valuation discounts and other planning strategies, which may be particularly useful, in this historically low interest rate environment.
An additional benefit to making gifts now, relates to the New York estate and gift tax rules. New York State’s exemption amount for 2021 is $5,930,000 ($11,860,000 for a married couple). However, New York does not have a gift tax. Therefore, if an individual makes a gift in 2021, and survives three (3) years, that gift is completely excluded from the individual’s estate, for New York State estate tax purposes.
In other words, for Federal and New York State Estate tax purposes, now is the time to make large gifts, to avoid a potentially large estate tax later.