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Anticipate Tax Increase for Large Estates

By Tom Ochsenschlager, J.D., CPA

The Tax Cuts and Jobs Act (TCJA) increased the federal exemption for estate, gift and generation–skipping transfers to $11.18 million for singles and twice that ($22.36M) for married couples. The exemption amount is indexed to inflation and currently stands at $11.58 million per taxpayer ($23.16M for married couples). In effect, all but the wealthiest taxpayers are excluded from the federal “estate” tax. However, it is important to note that this provision of the TCJA expires Jan. 1, 2026, and the exemption amount then reverts back to $5.6 million per individual (indexed to inflation since 2018) – roughly less than half the current amount.

Regarding the presidential candidates, the Trump administration has indicated it will seek to extend the TCJA exemption amount. However, the Biden campaign has indicated it will propose two alternatives that would, in effect, tax the amount of the appreciation in assets passing through the estate. One alternative would be to reintroduce a proposal made by the Obama administration that would tax the estate for the appreciation of assets passed through the estate. The other alternative would be for the recipient of the assets from the estate to receive the estate’s basis in the property, in effect eliminating the stepped-up basis of current tax law.

Regardless of who is elected as our next president, given the historically high level of the federal deficit, there will be pressure on Congress to permit the higher exemption amount to expire in 2026 or perhaps even pass legislation to expire it earlier. Accordingly, wealthy clients should develop a plan to utilize the current exemption amount, as this could become a “use-it-or-lose-it” situation earlier than expected.

Taxpayers who are likely to be affected by the possible reduction in the exemption amount might consider making gifts directly to “descendants” who would be a beneficiary in the taxpayer’s will or, where the taxpayer desires to continue to maintain some control over the assets, set up a trust for the benefit of the descendants.

As under current law, in choosing what gifts to make or which assets to pass into a trust, it is important to identify assets that have a relatively low basis and assets that are expected to appreciate significantly in the future.

The taxpayer might consider retaining the “low basis” assets given that passing these assets through the estate will give the recipient a “stepped-up basis” at date of death whereas gifting the asset results in a “carryover” basis. However, if the taxpayer anticipates selling these low basis assets, it is also important to note that former Vice President Biden has suggested that he would propose to increase the tax on long-term capital gains to 39.6% for taxpayers with over $1 million of taxable income. Accordingly, significant taxes might be saved if high income taxpayers gift this appreciated property to a recipient subject to the lower capital gains rate prior to the possible change in the tax law.

Regarding the category of assets where significant future appreciation is anticipated, retaining these assets in the estate will enable the beneficiaries of the estate to receive a “stepped-up” basis as of the date of the taxpayer’s passing. 

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