President Joe Biden delivered an address to a joint session of Congress on April 28, 2021 during which he unveiled the “American Families Plan,” a broad and sweeping proposal with several implications to existing tax policy, among much more (including education, nutrition and health care).
While the American Families Plan did not specifically include proposals that then-candidate Biden made prior to being elected, a few of the provisions that were articulated to be components of the plan would likely have significant impact on the transfer of wealth through inheritance.
What’s Not Included
Biden’s pre-election proposals included a reduction of a taxpayer's unified exemption from estate and gift taxes from the current, inflation-adjusted threshold of $11.7 million down to an amount as low as $3.5 million, which would impact far more inheritances than is currently law.
Another proposal that Biden discussed during his candidacy was an increase of the estate and gift tax rate from the current 40 percent to 45 percent.
Neither provision ultimately made it into the plan that Biden presented to congress and is currently available for review on Whitehouse.gov. However, other provisions of the plan could impact a great number of taxpayers, and nothing in this current proposal prohibits the administration or the U.S. Congress from proposing increases to the estate and gift tax rates or lowering the exemption-eligible threshold at some point during the legislative process.
What Is Included
The $1.8 trillion American Families Plan is composed of $1 trillion in spending and $800 billion in tax cuts and credits for moderate/lower income families. The two most relevant components of the proposed plan relative to estate planning are the following:
Eliminating the Step Up in Basis. Under current law, the income tax basis of property acquired from, or passing from, an individual at time of death is its present-day fair market value, rather than its original cost to the deceased. The benefit of this rule is that the economic gain of property that appreciates prior to the owner’s death is not subject to federal income tax upon its passing to an heir. Under the Biden proposal, the appreciation of the property’s value prior to the owner’s death would become taxable income to the inheriting heir. Significantly, however, it has been suggested by the Biden administration that such legislation would be designed with protections that would exclude family-owned businesses and farms, if the decedent's heirs continue to run the business.
Other provisions of the broad proposal that may affect estate planning include:
- Subjecting long-term capital gains and qualified dividend to ordinary income tax rates: The rate applicable to long-term capital gains and qualified dividends would be increased to 39.6 percent for households earning more than $1 million.
- Increasing the top Income tax rate: The top tax rate on income would be increased from 37 percent to 39.6 percent for taxpayers within the top 1 percent of wage earners.
- Eliminating the “carried interest rule:” Income associated with "carried interest" would be taxable at the ordinary income tax rate (proposed to be raised as high as 39.6 percent, rather than the current law capital gains rate of 20 percent), in effect doubling the tax rate on carried interest.
What to Consider Now
While this specific draft proposal did not include many of the expected proposed changes to estate and gift tax legislation, it seems likely that, should some version of this proposal ultimately become law, new tax rules will have a significant impact on estate plans currently written and in place. And proposals offered by candidate Biden could resurface in legislation as it makes its way through congress.
Accordingly, it’s time to consider now what might have to be addressed soon for estate planning purposes. Remember, an estate plan is both a plan and a strategy. It should not only clearly articulate intent; it should also be strategically designed to maximize the value of transferred assets and property from decedent to heir (if those are the deceased wishes). As with any strategic plan, as facts and circumstances change, so too must plans and roadmaps.
A scheduled, periodic review of your will, trust and estate planning is a wise course of action under any circumstances. Given that both the president and lawmakers have demonstrated an interest in legislative changes that will impact estate planning, now is the time to consider how your current estate plan might be affected by the American Families Plan (or legislation like it), and to start taking action to mitigate any unwanted and unforeseen consequences that might be more difficult to undo once proposals become signed legislation.
If you have any questions, or would like to schedule a meeting to review your current plan (or create one), please contact Michael Taylor.
