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Potential Federal Estate Tax Law Changes Under Biden Administration

by Phil Levin, Esq. on April 1st, 2021

There has been much discussion in Congress of changes to the tax code in the coming months or years. Tax laws seem to change more often these days, which hampers tax planning for the long-term.

Currently, for your estate to be impacted with federal estate tax upon death, you would have had to accumulate over $11.7 million. Biden’s team has discussed lowering that exemption to between $3.5 and $5 million, with anything above that amount being taxed at a rate of between 40-55%. Even at those levels, the tax would not affect most U.S. citizens.

What may be more concerning for the majority of our clients is the possibility that a new tax law would eliminate “step-up in basis” laws and instead be replaced by “carryover basis.” Under current law, if you passed away today, your heirs inherit any highly appreciated assets (i.e., stock and real estate) with a basis for transfer tax purposes at the value as of your date of death.

If for example, you bought Apple stock in 1980 for $5 and it’s now worth $500. If you sold your stock during life, you would have a capital gains tax due on $495 worth of the value of that asset.

Under current law, upon death your heirs would inherit your assets with a stepped-up basis based upon the value of the asset as of the date you passed away (i.e., the basis for the Apple stock in the example above is now $500, not $5). Therefore, if your beneficiary sells the stock for $500, he or she pays no capital gains tax.

If federal tax laws changes, with a switch to carryover basis, then your beneficiary would inherit your property with your basis (i.e., $5 instead of $500). The effect of this change would impact the vast majority of citizens who own highly appreciated securities, which would impact many more people than a change in the federal estate tax exemption amount, as detailed above.

We will continue to monitor these potential changes in federal estate tax laws, and provide you with updates as we learn of them.

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