June 2021

In the Money: The Impending Death Tax Sledgehammer


By Daniel R. Weiner

“Ending a Rigged Tax Code: The Need to Make the Wealthiest People and Largest Corporations Pay Their Fair Share of Taxes.” This is the title given to the Budget Committee hearing presided over by Senator Sanders on March 25, 2021, out of which emerged the proposed For the 99.5% Act. President Biden has since clarified and refined the intentions of the administration in this area. The proposed new legislation purportedly targets the wealth accumulated by the families of Jeff Bezos, Elon Musk and Mark Zuckerberg, who are called out by name. In reality, the impact of these new laws would be felt not just by the nation’s billionaires, but also by families that most would not consider to be ultra-wealthy. Some of the main highlights are summarized below. For those potentially affected, we are up against the clock to mitigate the effects of the new law. With January 1, 2022 being targeted as the effective date of the legislation, that leaves barely 6 months to plan.

Estate Tax Exemption to be Slashed

This has been a key component of the Biden tax plans for several years now, but the proposed legislation has formalized the intention to lower the estate tax exemption from its current level of $11.7 million to $3.5 million. The rate of taxation is also slated to increase from the current rate of 40 percent to a range of 45-65 percent depending on the level of assets to be taxed.

To give a couple of examples: individuals with a net worth of $5 million currently can leave those assets to their family without any estate tax being due. Under the proposals, the family would pay almost $700,000 in tax. If leaving behind $10 million, tax would be around $3 million, whereas currently it would be zero. Married couples have double the exemption of an individual. Currently a married couple can leave $23 million to their family with no estate tax payable. The new laws would create a tax bill of around $8 million.

Step Up in Basis to be Eliminated

Under current law, if you inherit a property or stocks from your parents, you can avoid paying capital gains tax if you sell the asset shortly after inheriting it. This is because the cost basis gets “stepped up”. This means that if you inherit a house worth $1.5 million for which your parents paid $300,000, the deemed purchase price of the house if you choose to sell it will be $1.5 million, eliminating any capital gains tax. One of the proposals on the table involves largely eliminating this significant tax benefit. Even more dramatic is the possibility that the new laws could impose a capital gains tax on inherited assets, even if the assets are not sold following the death of the owner.

What To Do Next

The proposed legislation, if enacted, would amount to the most sweeping shift in the tax landscape in a generation. We do not know whether the legislation that is ultimately passed will be as currently proposed or a watered down version. However, even a watered down version would bring far more families into the estate tax net and would curtail the use of our favored planning tools to reduce that exposure. The possible elimination of the step up in basis will affect a great many families across California and, indeed, the country. Some of the changes will come into effect on the “effective date” (possibly 1/1/2022), while others are to come into effect on the date of “enactment” of the legislation (ie some time during 2021). Time is therefore of the essence. If your family may fall within the scope of these proposed new laws, the time to act is now.

Daniel R. Weiner is a trusts and estates attorney. Areas of practice include: wills & trusts, estate tax planning, Medi-Cal asset protection planning, special needs planning, and kids protection Pl.


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