2 New Tax Changes that Will Impact Your Estate Plan

With the implementation of the Biden administration in the country, various changes are likely to occur including several related to estate planning. One change involves a reduction in the estate tax exemption while a second revision to estate planning law is an elimination of the basis step-up for inherited property. 


While these changes are likely to occur, it is difficult to both predict what repercussions this change will have as well as when these changes take effect. To better prepare people interested in creating successful estate plans, this article reviews some critical details to understand about these approaching changes.


Preparing for the Elimination of Basis Step-Up


Eliminating basis “step up” at the time of a person’s death will likely have a substantial impact on taxes. Assets were long valued at the time a person passed away even if the value had increased. Because the base value of an asset was “stepped up”, parties were often able to avoid facing capital gains taxes placed on a property. 


The Biden administration, however, plans to eliminate the basis step-up rule, which means that gains will now be recognized at the time an asset is transferred. If a gain is recognized, this could result in substantial tax consequences for individuals who inherit assets with high appreciation values.


To navigate the financial challenges of a step-up basis being eliminated, people engaged in the estate planning process should now consider placing assets in a trust. By placing an asset with a greater capital gain in a trust while gifting other assets directly, people engaged in estate planning might find they can substantially reduce the capital gains that beneficiaries would be required to pay.


To avoid these undesirable tax situations, if you are prepared to gift assets now to loved ones, you should consider various strategies to make the most of higher estate and gift tax exemptions before they are lowered. 


The Reduction of Estate Tax Exemptions


Under the Tax Cuts and Jobs Act of 2017, the exemption for estate, gift, and generation-skipping transfer taxes are $10 million. Any transfers of assets above these exemption thresholds are subject to a 40% tax rate. 


This exemption, however, is scheduled to lower to $6 million at the beginning of 2026. Due to the change in political administrations as well as changes in the House and Senate, a reduction in this exemption amount might occur much earlier. Also, while the exemption amounts will be reduced to at least $6 million, some experts think this amount could be lowered to $3 million.


To avoid undesirable tax consequences later, it is worth considering whether transfers should be made now to make the most of tax thresholds. Other advantageous gifting techniques might involve gifting current interests in businesses or creating irrevocable life insurance trusts or spousal limited access trusts.


Speak with a Knowledgeable Estate Planning Lawyer

The field of estate planning is full of complications including those related to taxes. One of the best ways to navigate these issues is to obtain the assistance of an experienced estate planning attorney. Contact Ettinger Law Firm today to schedule a free case evaluation.

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