President Joe Biden has proposed tax law changes that could affect many family farms. The changes most concerning to my clients are those related to the estate and gift taxes, and stepped-up basis. As of early March, there has not been any official implementation of his proposed changes, and it is difficult to predict exactly how the proposals will affect the laws.
That said, let’s look at how these proposed federal estate and gift tax laws would change:
- The estate and gift tax rate would increase from 40% to the 2009 rate of 45%.
- The estate and gift tax lifetime exemption would be lowered from $10 million (adjusted for inflation) to the 2009 level of $3.5 million.
If there is a reduction of the estate and gift tax exemption, it seems likely the proposal will be modified. Possibly the exemption will be closer to the Obama administration’s $5 million lifetime exemption (adjusted for inflation), with the tax percentage staying at 40%. This would essentially accelerate the sunset of the exemption limit that is set to reduce back to $5 million (adjusted for inflation) on Dec. 31, 2025.
If the exemption is reduced, it will be necessary to make sure estate plans maximize the use of the exemption amount provided. This means plans should use credit shelter trusts, discount planning to reduce the value of the estate, gifting to remove assets from the estate, and charitable planning to maximize charitable deductions. As we watch the federal law changes, we should take into consideration the state estate tax laws, too, as we respond and plan.
In addition to Biden’s federal estate and gift tax law changes, he proposes to repeal stepped-up basis at death. Currently, when assets are received from a decedent at the time of death, the cost basis of the asset is the fair market value of the asset on the decedent’s date of death.
The repeal of stepped up basis would be a significant change in the transfer of assets upon death. If this happens, it would be important to assess your estate plan and determine how this change will affect the plan. Some items to look for are whether there will there be a sale of assets upon death, and whether the estate plan provides rights to purchase assets by heirs. If so, it will be necessary to account for the risk of paying capital gains taxes in these transactions and how this will affect the value of the estate plan distributions.
Balzarini is an attorney at law with Miller Legal Strategic Planning Centers P.A., Tyler, Minn. Contact him at [email protected].