With the 2020 Presidential election fast approaching, many Americans are wondering about the potential legislative impact of either outcome.
One area people are watching closely is estate planning, which could be affected by changes to laws around estate taxes and capital gains. Here’s what you need to know about how your plans could be impacted, depending on whether Trump is re-elected or Biden wins the presidency.
What current laws impact estate planning?
Current laws regarding estate taxes and gift-giving can impact your estate planning. Understanding these laws and the exemption limits can help you more effectively plan your estate over your lifetime.
In 2007, the Commonwealth of Virginia repealed its state-level estate tax. However, estates of a certain size (larger than $11.58 million per individual, or $23.16 million per married couple) are still subject to federal estate tax laws. The exact amount your estate must pay will depend on how much larger it is than the federal exemption limit, with higher taxes being placed on bigger estates.
To reduce their taxable estate, many individuals choose to use gifting of assets throughout their lifetime. Gift taxes are paid by the individual who gives another person assets over a certain amount (currently $15,000 per individual per year, which will remain the same in 2021); gifts under this amount are tax-free and do not need to be reported as income. You would only need to monitor your non-exempt lifetime giving (the combined amount you give away prior to death and leave to others after death) falls under the current federal limit.
What might change based on the 2020 election?
Depending on whether President Trump or former Vice President Biden wins the election, the following aspects of estate planning could be affected:
1. Exclusion amount
The current exclusion amount is $11.58 million per individual ($23.16 million per married couple), and estates in excess of the exclusion are currently taxed at 40%. Under Trump, the current exclusion amount will be in effect until 2025. At that time, exemption amounts will be reduced to $5 million per individual ($10 million per married couple), indexed for inflation.
Conversely, Biden has suggested that he plans to return to a “historical norm” of a reduced exclusion amount. Though he has not provided specific dollar amounts, experts have interpreted the amount to be either $5 million or $3.5 million — a number that would significantly increase the number of estates that are subject to taxation.
2. Stepped-up basis
After an individual passes away and leaves an asset to another person, the basis (the original owner’s initial investment in the asset) rises to the current market value. The new owner inherits the asset at its “stepped-up basis,” and they are free to immediately sell the inherited asset with minimal to no income tax. Biden has proposed to repeal stepped-up basis, which has remained in effect during Trump’s presidency.
3. Capital gains
Biden’s proposed elimination of the stepped-up basis would increase capital gains taxes for those who inherit the assets. Capital gains refers to the profit made from receiving an asset at one value, and selling it at a higher value. For most of the middle class, a home is the most valuable asset a family owns, and this repeal would be a serious setback to the ability to pass this part of a family’s built-up wealth to the next generation in the tax-free manner that has long been relied upon by families in the United States.
Have questions? Ask an experienced estate planning attorney.
Regardless of who wins the 2020 election, it’s a good time to look at your net assets and understand the size of your taxable estate. If you are close to the current threshold, you may wish to take action now to reduce your estate size in case the exclusion amount is lowered next year.
Have questions about your estate plans? The Law Office of Patricia E. Tichenor is here to help you. Schedule your free consultation today to discuss your circumstances and needs.