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Benjamin Franklin’s famous quote, “Nothing is certain except death and taxes,” still rings true today. In fact, both death and taxes come into play when talking about the federal estate tax. The estate tax is a tax on the value of assets owned at death, in excess of an exemption amount.

In light of the upcoming election, it’s no surprise that each candidate has widely differing proposals for the future and scope of the estate tax, along with other proposals that could impact the amount of tax owed on your assets at death.

Before we look at these proposals, let’s review the current landscape.

In recent years the estate tax exemption, combined with elimination of taxable gain on appreciated assets owned at death (through step-up to fair market value), has largely minimized the taxes owed at death.

In fact, the passing of the Tax Cuts and Jobs Act (TCJA) at the end of 2017 doubled the federal estate tax exemption from $5.49 million to $11.18 million per person through 2025. This exemption amount is indexed for inflation and currently sits at $11.58 million for 2020. Those who pass away with a gross estate lower than this threshold will not owe any federal estate tax. Also, those who are married may transfer any unused portion of their exemption to a surviving spouse. This option is called “portability” and allows married couples to avoid estate tax at a combined gross estate of more than $23.16 million. This is good news at the current estate tax rate of 40%.

It’s no surprise, then, that with the increased exemption amount, very few estates are subject to federal estate tax. In fact, the Tax Policy Center expects only about 4,100 estate tax returns to be filed for those who pass away in 2020. Of these returns, less than 2,000 will be taxable! This represents less than 0.1 percent of individuals expected to pass away in 2020.

President Trump has proposed extending the TCJA-enacted estate tax exemption even longer, while Joe Biden may let it expire as planned.
However, with much uncertainty on what future tax policy will be, many wonder if the higher TCJA exemption amounts could be eliminated even sooner than 2025. Biden has also proposed eliminating the current step-up in basis for assets transferred at death. Gain on appreciated assets would then be taxable, either at death or when eventually sold.

This election outcome could have meaningful consequences for the future of estate tax in the years to come. For wealthy taxpayers concerned about a possible reduced exemption and elimination of step-up in basis at death, it may be appropriate to take advantage of advanced wealth transfer strategies to minimize potential future taxes and protect assets as much as possible. Consult with a trusted advisor to determine if any action may make sense for you.

Sources: Tax Policy Center Briefing Book, Key Elements of the U.S. Tax System Accessed: 10/15/20; Mighty Taxes, Death & Taxes Quote: History, Meaning, (True) Origin? Accessed: 10/15/20; CPA Practice Advisor Election 2020: Comparing the Biden and Trump Tax Plans Accessed: 10/15/20

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