With a Democratic majority now settled into Washington, estate planners are contemplating the potential impact on the estate and gift tax exemption previously increased by the preceding Republican administration. Whether any changes to the estate and gift tax exemption will be made in the near future remains speculative, but the possibility of retroactive legislation has estate planners on high alert. Many clients made gifts in 2020 in anticipation of the "Blue Wave," and many more will continue to make gifts this year, taking advantage of the current $11,700,000 federal estate and gift tax exemption which is scheduled to sunset on Dec. 31, 2025, under current federal law. What happens if a client made gifts that exceed a retroactive change to the estate and gift tax exemption? With careful planning, clients may be able to take advantage of the current enhanced estate and gift tax exemption and avoid gift tax.

Biden Estate and Gift Tax Proposals

During the 2020 campaign, the Biden administration originally proposed lowering the federal estate and gift tax exemption to $5,000,000 for individuals ($10,000,000 for married couples), and later proposed to restore the exemption to 2009 levels of $3,500,000 for individuals ($7,000,000 for married couples) for estate taxes and $1,000,000 for gift taxes ($2,000,000 for married couples). The most recent Biden proposal released last fall also includes increasing the top estate and gift tax rate from 40% to 45%, and repealing the step-up in basis at death on capital gains exceeding $100,000. The repeal of the step-up in basis will likely mean that death will be treated as a realization event, thereby triggering tax on unrealized capital gains at death.  Capital gains are also proposed to be taxed at an increased ordinary income tax rate 39.6% for taxpayers with income above $1,000,000.