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May 7, 2021

Recently Proposed Changes to Federal Estate and Gift Tax Laws
Alli Thomas

Although most of the action taken by the new presidential administration has centered around getting a handle on the COVID-19 pandemic and stabilizing the economy, Congress may soon have a new focus: tax reform.

Recently, Senator Bernie Sanders proposed major changes to federal estate and gift tax laws. Many tax experts agree that changes to the tax code are likelier to happen now that the executive and legislative branches of the U.S. government are aligned politically.

Here is a summary of the current laws and the proposed changes:

Current Laws

  • The estate tax lifetime exemption is $11.7 million per taxpayer
  • The estate tax rate is a flat 40%
  • The capital gains tax for taxpayers in the highest income bracket is 20%
  • The cost basis of inherited property is “stepped up” to its fair market value without triggering capital gains tax on the appreciation of the property value that occurred during the deceased property owner’s lifetime

Proposed Changes

  • The estate tax lifetime exemption would be reduced to $3.5 million—not adjusted for inflation
  • The gift tax lifetime exemption would be reduced to $1 million
  • Gifts to irrevocable trusts will be limited to $30,000 per donor per year
  • The estate tax rate would increase to a progressive rate, starting at 45% for taxable estates between $3.5 and $10 million and increasing on an upward scale to 65% for estates over $1 billion
  • Discounts for assets held in family entities (for example, limited liability companies) would be eliminated
  • Dynasty trusts would be subject to a generation-skipping transfer tax after 50 years
  • Capital gains for taxpayers in the highest income bracket would double to 40%

What Action Should I be Taking Now?

It’s impossible to know whether these proposed changes will be made into law. However, they could be enacted as soon as January 1, 2022. And, if they are, that will effectively increase the number of estates that are subject to taxes.

If they are not enacted retroactively, now is the time to start having conversations with your family and an experienced financial planner to decide if you should be making gifts to your beneficiaries or to irrevocable trusts.

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