The Biden administration has proposed big tax law changes, with some of the most sweeping changes being made to taxes on assets passed on at death, often called estate taxes. Here’s a summary of the most notable proposals and strategies to consider if they are passed into law.

Proposed Changes

These are some of the major changes on the horizon if this tax plan is implemented:

Reduction in estate tax exemption to $5.49 million. Currently, your first $11.7 million passes tax free, whether you give this away during your life or pass these assets at death. Biden’s proposal reduces this to $5.49 million, while other proposals reduce this as low as $3.5 million.

Estate tax rate increase to 45%. Today, you pay a 40% federal tax on assets above the exemption limit.

Elimination of the step-up in cost basis at death. This is one of the most significant changes. Your “cost basis” is the amount paid for an asset and capital gain taxes are paid on any gain above your cost basis. Under current law, when you pass assets to your beneficiaries, they receive a step-up in cost basis to value on the date of your death – they don’t pay tax on gains earned during your life.

For example, if you purchased a rental home for $500,000 and it was worth $1.2 million when you left it to your children at death, their “cost basis” is stepped up to the $1.2 million value and they would only pay capital gain tax on any gain above $1.2 million.

This step-up would be eliminated under the Biden proposal. Other proposed changes repeal this step-up for the most part and instead give individuals a $1 million step-up in basis exemption and married couples would receive a $2 million exemption. Anything above those exemptions would be subject to capital gains tax.

The full step-up in basis would remain in place for family-owned businesses and farms if the business or farm is left to family members who continue its operation.

Elimination / Limitation of Several Estate Tax Reduction Strategies

Several common strategies to reduce estate and gift taxes are also affected by proposed tax law changes.

  • Grantor Retained Annuity Trusts (GRAT) allow you, the grantor, to gift an appreciated asset to an irrevocable trust and receive an income from the trust for a period of years. At the end of the term, remaining assets are removed from your estate and not subject to estate tax. If you die before the end of the term, the assets are still included in your taxable estate. New proposals set a 10-year minimum term length. Additionally, the remaining assets cannot be less than 25% of the original gift or $500,000, whichever is greater.
  • Legacy Trusts/Dynasty Trusts are irrevocable trusts that, in many states, can transfer wealth to generations of your family for 100 years or more and avoid any inclusion for estate tax. New proposals would eliminate this exemption for any trust with more than a 50 year life.
  • Grantor Trusts like Intentionally Defective Grantor Trusts (IDGT) enable you, the grantor, to remove assets from your taxable estate by transferring assets to the trust and paying any trust income taxes. These assets grow and pass estate tax free to your next generation. The For the 99.5% Act proposal would:
    • Include these assets in your estate for estate tax purposes
    • Impose a gift tax on trust distributions to beneficiaries during your life
  • Valuation discounts for family owned businesses. Current law allows you to discount the value of shares in a family business, family limited partnership, or family limited liability company due to lack of control and marketability when transferred to family members, reducing potential estate tax. The proposed legislation greatly reduces and possibly eliminates these discounts.
Estate Planning Strategies to Consider

With these proposed estate tax changes on the horizon, certain strategies can still help you reduce your potential estate tax bill.

Accelerate use of strategies that may be eliminated. Before these laws pass, consider the strategies listed above that could be limited or eliminated, as they are likely to be grandfathered in if set up before new law is enacted. Strategies like Grantor Retained Annuity Trusts (GRAT), Intentionally Defective Grantor Trusts (IDGT), Spousal Lifetime Access Trusts (SLAT), and Irrevocable Grantor Trusts (IGT) can be powerful estate tax reduction tools that may not have the same effect if new law is passed.

Make large gifts today. Take advantage of the historically high $11.7 million exemption by making large gifts before it is reduced. Consider strategies like funding Irrevocable Trusts, Dynasty Trusts, or Irrevocable Life Insurance Trusts to maximize the tax free growth of your assets for your future generations.

Preserve flexibility for the future. Consider trust strategies that move assets out of your estate but preserve some access to the assets through loans or special distribution provisions like Spousal Limited Access Trusts (SLAT) or Special Power of Appointment Trusts. These strategies help you stay flexible for future tax law changes or needs to access funds down the road. For more, read Out of Your Estate, Not Out of Reach.

Preserve insurability. Life insurance often exponentially increases many strategies to pay estate taxes because death benefits pass income tax-free. To prepare for increased estate and capital gain taxation, consider acquiring convertible term insurance today. If these laws pass, you’re able to convert the term coverage to permanent coverage without additional health underwriting, preserving your insurability and flexibility to pay any new estate taxes.

Remember that these proposals are still under negotiation and are not yet law. Estate planning is a balance between keeping control of assets you’ll need and maximizing impact of assets you won’t need on loved ones and causes you care about. While reducing taxes is important, don’t let the tax tail wag the planning dog. That said, if you plan to pass wealth to family or charity, waiting could be costly – the time to plan and implement strategy is now.

Sources – CNR, CNR, Lion Street



Alterra Advisors - Josh Whelan

Grant Monson

Partner, Financial Advisor

About the Author

Grant grew up on a working wheat farm in eastern Washington. Today, he credits his family – who still manage the farm – for preparing him to build a business serving others. His vision to lead Alterra is built on relentless dedication to the success of his clients and the team – his extended family.

Grant’s dad says that he hasn’t worked a day in his life because “it isn’t work when you love what you are doing.” When combined with his mom’s view that “helping others should be part of every day”, Grant’s view of financial planning comes into focus. Alterra Advisors is very much a reflection of Monson family values.

Grant earned a bachelor’s degree in business and a master’s in economics at Washington State University. He launched his own financial advising practice over a decade ago, an entrepreneurial quest has become one of the most impactful things in Grant’s life. He loves coordinating the complex financial lives of business owners, bringing a depth of understanding that is rooted in his family’s own experience.

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