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Potential inheritance tax changes under the Biden Administration

On Behalf of | Oct 29, 2021 | Estate Planning

President Joseph Biden introduced tax reforms back in July, including one that would affect estate planning and inheritances.

Congress has only begun weighing this proposal in recent weeks. There’s likely to be a lot of bipartisan wrangling before any changes are passed. It can be helpful to know what is potentially on the horizon should some semblance of the proposed tax hike ultimately get passed by both federal legislative bodies and make it back into President Biden’s hands.

How does the tax proposal impact estate planning?

The President’s latest proposal calls for an elimination of the step-up death adjustment. This would mean that estate beneficiaries would inherit the original cost basis of the estate taxes and be responsible for paying capital gains taxes on any deceased’s property that they sell. The proposal also spells out President Biden’s wish for the capital gains tax rate to increase to 43.4% of those individuals making over $1 million annually. 

At the same time, the proposed Sensible Taxation and Equity Promotion Act (STEP) allows estates to make capital gains tax payments across 15 years and receive a tax exemption on up to $1 million in unrealized gains. There’s also another proposal on the table that would time limit generation-skipping trusts. 

What are the implications of the proposed tax reforms?

Many analysts argue that this tax reform would flip estate planning on its head. They note few heirs find themselves having to pay federal gift or estate taxes. The potential of the gift or estate tax rate increasing to between 45 and 65% for larger estates is a hard pill to swallow. 

The new proposal would require Grantor Retained Annuity Trusts (GRATs) to retain a 25% taxable remainder minimum value as well, which has its own host of complications in addition to the time limits that may be imposed.

You can take proactive measures now to minimize the potential implications associated with the passing of these estate tax reform proposals. You’ll want to start weighing your options now so that you don’t find yourself having to digest all of this and scrambling to make quick decisions in the near future.