By Rolando Garcia, JD, CPA

If you’ve been considering taking advantage of the generous estate and gift tax exemptions introduced by the Tax Cuts and Jobs Act (TCJA), it may be time to act now before it’s too late. Support continues to grow for Democratic presidential nominee Joe Biden, and if he is elected in November, wealthy taxpayers can expect to see significant tax hikes across the board and the removal of favorable tax exemptions currently in place as soon as next year.

Current Estate and Gift Tax Rules

For higher-income taxpayers, it’s a great time to transfer wealth. The TCJA doubled the amount individuals can transfer without being subject to a 40% estate and gift tax rate. Additionally, the estate and gift exemption amount is currently at an all-time high of $11.58 million per individual. This exemption amount is expected to revert back to $5 million per individual (to be adjusted for inflation) at the end of 2025 (or sooner pending another tax overhaul). Currently, there is no clawback provision in the increased exemption, so the approximate $6.5 million excess during this time period will evaporate if not used.

Additionally, any gift tax exemption used during your lifetime reduces the estate tax exemption available at death. This is a very tax-efficient method to consider, especially if your estate exceeds $6 million (twice this amount if you’re married). Taxpayers can also exclude certain gifts of up to $15,000 per recipient without depleting any of their gift and estate tax exemption. As mentioned above, not using the temporary $6.5 million excess will result in those amounts simply evaporating.

What May Change

Under a Biden presidency, wealthy taxpayers will not only likely see an increase in individual tax rates, but will also see current estate and gift tax rules rolled back to pre-TJCA days. Based on Biden’s proposed tax plan, here’s how wealthy taxpayers could potentially be impacted from an estate and gift planning perspective:

1) Changes to estate and gift tax policy. Estate tax rates could increase from its current 40% rate to 60% or higher. Plus, taxpayers should also anticipate the unified estate and gift tax exemption to go back to $5 million or lower. With this in mind, taxpayers should definitely make gifts now, even if they’re taxable gifts. From a strategic perspective, gifting early is always recommended because if an asset appreciates in value, that appreciation takes place outside the estate.

One area of question related to estate and gift tax planning is whether a Biden administration would grandfather the protection granted by the Internal Revenue Service’s final anti-clawback regulations. These regulations state that gifts that use up the bonus exemptions before it is currently set to expire won’t be clawed back into a taxpayer’s estate if the exemption drops back down.

2) Repeal in the step-up in basis at death. Currently, an heir is able to minimize their tax liability when they sell assets they’ve inherited from someone at death due to the step-up in basis rule. Under this rule, an individual can hold onto an asset and allow it to appreciate over the years, then pass it onto an heir at death. The heir will then receive a step-up in basis, meaning the assets will be valued as of the date of death.

However, Biden proposes repealing this step-up basis rule and taxing the unrealized appreciation at death, subjecting the heir to taxes at the transfer regardless of whether they sell the asset. From a planning perspective, taxpayers may consider selling most of their assets to a grantor trust in exchange for a promissory note, so that appreciation takes place outside the estate and they can retain an income stream of cash payments for life.

Another major tax overhaul would also need a cooperative Congress for Biden, so the outcome of this election year will be noteworthy. Nonetheless, wealthy taxpayers should still plan ahead. Doeren Mayhew’s dedicated private wealth tax advisors work closely with individuals to identify tax strategies to help ensure their wealth is protected. To obtain estate tax planning assistance, contact us today.