May 2021

The MLO Minute: By Danielle Friedman, Esq. — 

Legislation proposed in the Senate would transform the estate tax, requiring more estates to pay tax. Another proposed law would eliminate the step-up in basis that is currently afforded to inherited assets.

 

Senator Bernie Sanders’ bill would reduce the current federal estate tax exemption from $11.7 million for individuals and $23.4 million for couples to $3.5 million for individuals and $7 million for couples. Estates between $3.5 million and $10 million would be taxed at 45%, and the rate would jump to 50% between $10 million and $50 million, 55% for estates over $50 million and 65% for estates valued at over $1 billion. Currently, estates over the exemption are taxed at 40%.

 

Under Sanders’ bill, the lifetime gift tax exemption would also be reduced from $11.7 million to $1 million, which would severely limit many strategies currently used to reduce federal estate tax liability.  However, individuals would still be able to give away $15,000 per year to an unlimited number of recipients without the gift counting towards the lifetime exemption.

 

The current federal estate tax exemption will expire at the end of 2025 and will revert to its previous amount of $5 million for individuals and $10 million for couples unless legislative action is taken. President Biden’s American Families Plan does not propose any changes to the estate tax and Sanders’ bill faces an uphill battle.

 

Another major taxation change is also being proposed in the Senate through a law that would eliminate the step-up in basis that beneficiaries currently receive when they inherit property. Right now, if a beneficiary inherits property, that property’s purchase price or cost basis is “stepped up” in value to the property’s fair market value as of the deceased owner’s date of death. If the property is sold shortly after being inherited, typically no capital gains are due on the sale. If the beneficiary holds on to the property and it appreciates in value before it is sold, capital gains tax will only be due on the difference between the sales price and the stepped-up basis, not the decedent’s original cost.

 

A proposed bill in the Senate changes that. The proposal would require an estate to pay tax on the difference between the deceased owner’s cost basis and the date of death value. The bill would allow the first $1 million of appreciated assets to pass without such taxation. In addition, families that inherit a farm or a business would be able to pay any tax due over a 15-year period. Any taxes paid under the bill would be deductible from the estate tax. As it stands, it’s unclear whether this proposal has support to pass the Senate.

 

While the future of the estate tax remains uncertain, there is no doubt that right now is the best time to consult with an estate planning professional to create a flexible estate plan.