Updated: Sep 1
Politics aside, it's important to know how different policies could affect your money.
Two of the main components of Joe Biden's proposal that will affect a lot of our clients are detailed below --
Estate and gift tax:
Current law: For 2020, the estate and gift tax exemption is $11,580,000. This amount is scheduled to revert to the pre-TCJA indexed amount of approximately $5.8 million after 2025. Transfers of appreciated property at death get a stepped-up basis. Donald Trump: Extend the higher estate and gift tax exemption enacted by the TCJA that is scheduled to expire after 2025. Joe Biden: Eliminate stepped-up basis on transfers of appreciated property at death.
What does it mean?
Let's start with the term "step-up in basis" which affects most of our clients. This would be for assets outside of your 401(k), IRA, Roth IRA. Think joint account, taxable account, real estate.
Example: If you buy a stock in your taxable account (aka brokerage account) for $100 and it grows to $200, there would be $100 of gain. If you pass away and it gets passed on to your kids, current law says their basis would be $200 - they could sell at $200 and pay little-to-no tax. If that gets eliminated, there would be tax to pay.
On a larger scale, there are clients of ours that put $500,000 into their taxable accounts that are now worth $1,500,000. They would definitely prefer to give money to their favorite charity or human beneficiary rather than the government in most cases.
Now let's look at the estate tax exemption. This establishes a threshold (an exemption) at a certain dollar amount. If the individual's estate is above the exemption amount, then dollars above that threshold are tax (upwards of 40-45%). The current exemption is pretty high, sitting at $11,580,000 for 2020. However, this number is historically pretty volatile. Just 15 years ago, it was only $1,500,000 per person. Under Joe Biden's plan, the exemption would get moved down to $3,500,000 per person - although this sounds like a lot, it's an amount that is achieved all the time from investors, farmers, real estate owners, etc.
Some states, like New York, have state estate tax rates and exemptions as well - with pretty specific rules. However, for this post, let's focus on Federal taxes.
Confused yet? Here is an example:
A single person has an investment portfolio of $4.5 million and no other assets (such as real estate, just to make this example easy). That $4.5 million estate would pay no death taxes under current law. Should the exemption get moved to $3.5 million, the person would be $1 million over the exemption. That $1 million would then be subject to taxes (let's say $400,000).
What happens if their net worth is made up of a land asset, which could be illiquid (like a farm)? They are still on the hook for the cash.
Portability for married couples -
A law that became permanent under the Obama administration allows for portability between spouses. This simply means that when Spouse A dies, they can give (port) their exemption to Spouse B. It doesn't happen automatically, however, there needs to be the correct paperwork filled out. Examples can be found here. In short, it's a good thing for spouses.
So what can you do? We can look at vehicles like credit shelter trusts, giving money away to beneficiaries while still living vs. after death,
I do my best to keep politics out of the equation with clients and this is not meant to trash anyone - it's just what is being proposed and it's my job to help clients be efficient.