It is not unusual to have at least some tax law changes when a new administration takes over. We’ll focus here on potential estate tax changes that may happen under President-Elect Biden’s administration.
Under the Tax Cuts and Jobs Act of 2017 (TCJA), the federal estate tax threshold is at $11.58M (for 2020) and $11.7M (for 2021) and is indexed for inflation through 2025. That means that for someone who dies in 2021, their taxable estate would need to exceed $11.7M before a 40% federal estate tax would hit. If no change is made to TCJA, the federal estate tax threshold will reduce to $5M, indexed for inflation, at the end of 2025. Under President-Elect Biden’s proposed tax policy, the federal estate tax would be reduced to $3.5M with a 45% tax rate. Remember, this is a proposed tax policy. It will take Congress’s approval in order to make any changes. Because of the pandemic, it is likely that this will not be top priority under the pandemic is under control.
Please note that the above talks about the federal estate tax. Individual states can have their own estate tax – and Massachusetts is one of them. In Massachusetts, if a resident’s assets exceed $1M upon the resident’s death, then they are exposed to a Massachusetts estate tax. The Massachusetts estate tax imposes a tax on the first dollar and has a top tax rate of 16%. So, even if you do not have a federal estate tax exposure, you may have a Massachusetts estate tax exposure.
The following article provides some additional helpful information regarding President-Elect Biden’s proposed tax law changes: https://www.barrons.com/articles/joe-biden-wants-to-change-tax-policy-heres-what-he-might-accomplish-51606496735?mod=hp_LEAD_2_B_1 . Don’t overlook the correction note made at end of the article. The article mentions that one of President-Elect Biden’s proposed changes is to get rid of a step-up in basis on assets for capital gain tax purposes. It incorrectly states that an asset’s value resets to zero upon the owner’s death. Under the current law, an asset’s value is set at the fair market value at the owner’s death. This is a huge benefit for the beneficiaries of those who die owning appreciated assets. It alleviates the impact that capital gain taxes would have had if the owner had sold the asset during their lifetime. Although it is possible that the law could be changed to take this capital gain tax benefit away, it is believed that this law change will not get much traction, if any, in Congress – at least for the foreseeable future.
If minimizing your estate tax exposure is one of your priorities (whether for federal or Massachusetts purposes), it is crucial to meet with an estate planning attorney to help you analyze how you can put proper planning in place to help reduce your estate tax exposure. This will oftentimes be accomplished through gifting and the use of trusts.
