Democratic Win Means Estate Tax Law Changes

The results of the Georgia Senate election are in and Democrats have secured a Senate majority.  As a result, we expect tax changes. President-elect Joe Biden’s tax plans were laid out during his campaign last year. However, we did not expect Biden to be able to implement much of his agenda because of a Republican-controlled Senate.

But that all changed when Democrats beat incumbent Republicans in the Georgia runoff elections. Now that Democrats will control both the House and the Senate for at least the next two years, Biden’s tax plans have been fully revived.

As such, we anticipate tax changes impacting estate planning:

Decrease in Federal Estate Tax Exemption:

Perhaps the most significant change proposed under Biden’s estate tax plan is a decrease in the federal estate and gift tax exemption.

Under current law, an individual may pass $11,700,000 free of estate tax to their heirs (double to $23,400,000 for married couples). In 2026, this amount is set to decrease to $6,300,000 (double to $12,600,000 for married couples).

However, President-elect Joe Biden’s tax proposals could lower the exemption back down to $3.5 million per individual this year. So if you have over $3.5 million (including all assets and life insurance), then the sooner you can plan your estate, the better.

Elimination in Step-Up in Basis:

Biden’s tax plan has also proposed eliminating the tax benefit known as “step-up in basis,” which allows heirs and beneficiaries of inherited capital assets, such as real estate and stocks to readjust the tax basis of the asset to date of death value, thus eliminating capital gains. For example, if your parents purchased a property 30 years ago for $50,000. When you inherit the property upon their deaths, the current market value of the property is $600,000, which would result in a taxable gain of $550,000. However, step-up in basis allows you to readjust the cost basis from $50,000 to date of death market value, resulting in a $0 capital gain.

This important “step-up in basis” tax benefit could be eliminated, which would lead to significant capital gains tax after death.

Our most advanced clients have already started making estate tax planning changes to their estate plans.  We are happy to discuss with impacted clients what can be done now to prepare.

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