Tax Planning

Act now – Property tax planning underneath the administration of Biden

In the past twenty years, inheritance tax laws have changed dramatically. With democratic scrutiny in place in Washington, DC, additional reform of the estate tax is now a clear option.

Currently, any person can give away an amount of $ 11.7 million during their lifetime or distribute it upon death without being subject to federal estate tax. This high amount of exemption is subject to change under the Biden administration. Now is the time to speak to your advisor about reducing or eliminating your estate tax risk.[1]

Current inheritance tax laws
In 2001 the federal estate tax exemption became available [2] – The amount a person can give as a gift or transfer at the time of death – without being subject to inheritance tax – was $ 675,000. The highest estate tax rate was 55 percent.

In 2010, the estate tax exemption was drastically increased to $ 5 million per person, subject to a spike in inflation, and the estate tax rate was reduced to 35 percent. The tax rate rose to 40 percent in 2013 and has been 40 percent since then. Under the Tax Cut and Jobs Act 2017, inheritance tax exemption has been doubled to $ 10 million per person, depending on inflation. In 2021, each person has an exemption of $ 11,700,000.

Due to the expiry of the Tax Cut and Jobs Act, the amount of the exemption will decrease to $ 5 million per person in 2026, unless the laws are changed before that date. Wisconsin doesn’t have an estate tax of its own, but some states have estate, death, or inheritance taxes.

Another important aspect of estate tax planning is the base adjustment. If certain assets are included in a deceased’s estate, those assets will be given a new tax base equal to the date of death.

Pension accounts and pensions are exempt from this rule and do not currently receive a basic adjustment. For example, let’s say John Smith paid $ 50 a share for his 1,000 Apple shares. Its original base is $ 50,000. Ten years later, John dies and Apple’s 1,000 shares are in his estate. At the time of his death, the stock is valued at $ 130 per share for a total of $ 130,000. If John had sold this stock during his life, he would have incurred capital gains taxes of $ 80,000 ($ 130,000 in proceeds – $ 50,000 basis). However, because the base in Apple stock rose by the date of death, capital gains tax would only be paid on profits after death if the beneficiaries of John’s estate sold the stock.

Proposed changes under Biden administration
The Biden campaign proposed lowering the inheritance tax exemption to $ 3.5 million per person and raising the maximum inheritance tax rate to 45 percent. The Biden campaign also proposed removing the base adjustment for assets. It is not clear whether Biden’s plan would result in capital gains being realized before death at the time of a person’s death and therefore capital gains tax paid. Alternatively, if a beneficiary inherits the asset but does not sell it at the time of inheritance, Biden’s plan may provide that the increase in value be maintained before death until the asset is sold by the beneficiary and the beneficiary would pay capital gains tax on both pre-as even after death at the time of sale.[3]

Estate tax planning options
One of the simplest techniques for estate tax planning is to take advantage of the tax rules to give gifts without taking advantage of your inheritance tax exemption. First, the annual gift tax exclusion allows anyone to give up to $ 15,000 per year to another person without taking advantage of any tax exemption. Additionally, an individual can donate up to 5 years of annual exclusion to create a 529 account (a specific type of college savings account) without taking any inheritance tax exemption. Using this rule, a single person could fund a $ 75,000 college education account on behalf of a child or grandchild without an exemption, and a couple could fund a $ 150,000 account.

Second, a person can also pay certain study and medical expenses directly to a third party. For example, a parent can pay a child’s tuition fees directly to college and directly give the child an annual exclusion gift of $ 15,000 in the same year. Over many years, these simple gift giving techniques can be very effective in reducing the size of an individual’s estate, thereby reducing future estate tax risk.

Another technique is to give large taxable gifts. Since 2017, when inheritance tax exemption was doubled, estate planners have advised wealthy individuals to give large taxable gifts in order to take advantage of the client’s exemption amount. The IRS has confirmed that if a person gives great gifts and the exemption amount is reduced to an amount less than the value of the previous gifts in a later year, then those gifts are grandfather and no tax is payable.

However, there is a possibility that changes to the tax laws in 2021 will be made retrospectively as of January 1, 2021.[4] Given the current environment – both that the exemption is set to decrease to $ 5 million in 2026 and the real possibility that the Biden government will attempt to reduce the exemption sooner and / or to a lower amount – we are here currently in a situation where exemption should be used or it may be lost.

However, big gifts are a high risk, high reward planning option. If estate tax laws are unlikely to be passed this year, there may be another onslaught of people looking to give big gifts towards the end of 2021.

Article by my colleague, Individual tax planning after the elections in November 2020, Covers additional estate tax planning options, including running trusts (including those that perform well in today’s low interest rate environment), and provides additional prospects for income and capital gains taxes.

Due to possible changes in estate tax under the administration of Biden, individuals should review their current estate plans and work with their advisors on what steps should be taken to reduce or eliminate their estate tax risk.

If you have any questions about this item, please contact your Davis | Kuelthau, your lawyer, the author or the appropriate chairman of the Tax Practice Group Hereor chairs for trusts, estates and succession planning Here.


[1] While the current article focuses on estate tax planning for individuals, This Article by Attorney Mark J. Andres focuses on income tax planning after election, and This Article by Attorney Ann M. Rieger focuses on planning for family business owners after the election.

[2] While this article refers to the “estate tax” exemption amount, this exemption is a uniform exemption that covers both lifelong gifts and death transfers.

[3] The Biden administration would also likely seek to lower the generation skip tax exemption, but a discussion of the generation skip tax is beyond the scope of this article.

[4] There are some legal precedents to suggest that such a retrospective law to reduce exemption amounts is constitutional, but the exact issue of a retrospective law to reduce inheritance tax exemption has not been settled.

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