Could Biden’s Gift-and-Estate Tax Plan Cost Your Affluent Clients?
Authored By: Heather L. Schreiber, RICP®
What You Must Know—And What to Do About It
The Biden-Harris Administration’s proposed tax changes under the American Families Act (AFA) are designed to (a) require high-income taxpayers to pay their “fair share” of taxes and (b) provide relief to low and middle-income filers, mainly in the form of expanded tax credits.¹ (For an overview of those tax proposals, ask your internal for the white paper, “What’s Next: The Biden Administration’s Stimulus and Tax Plans.”)
In March, the $1.9 trillion American Rescue Plan Act (ARPA) became the sixth stimulus package designed to help Americans recover from the ongoing impacts of the COVID-19 pandemic.
ARPA’s tax breaks aim to provide income tax relief, mainly to lower and middle-income taxpayers. The AFA plan is to offset the resulting costs by imposing increased gift and estate taxes as well as steeper income taxes on high-net-worth (HNW) and high- income Americans.
Two of AFA’s proposed changes could significantly impact wealth transfers for your HNW clients.
That’s the bad news. The good news is that there are strategies to help mitigate potentially higher transfer taxes, such as the use of life insurance.
The Future of the Unified Estate and Gift Tax Exemption is on Shaky Ground
The Trump Administration’s Tax Cuts and Jobs Act of 2017 made significant changes to individual and corporate income tax rates. Moreover, the individual unified estate and gift tax exemption gradually increased from $5.4 million in 2017 to $11.7 million in 2021. (Double those numbers for married couples.) That increase is slated to sunset at the end of 2025 and return to prior levels, barring new legislation to accelerate or repeal the current tax regime.²
The Biden-Harris Administration is on record about its intent to dismantle the Trump tax cuts sooner than 2026, so you should be discussing plans of immediate action with your clients. The AFA calls for the now-unified estate and gift tax exemption to be replaced with a dual system: an estate tax exemption of $3.5 million and a gift tax exemption of $1 million. (Double those numbers for married couples.)
The decoupling of the exemption amounts would make it more challenging for individuals and couples with estates teetering near or above $3.5 million or $7 million to reduce their taxable estates through large lifetime gifts. The current gift tax annual exclusion amount of $15,000 would remain intact but could be capped at a maximum per donor under the new Administration; the current annual exclusion rule permits $15,000 in gifts to be made to an unlimited number of recipients.
What could such reductions in the gift and estate tax exemption amounts mean for your clients and prospects? If enacted, the number of people facing gift and estate tax exposure could increase exponentially from the highly affluent minority currently concerned to the more numerous moderately wealthy. What’s more, AFA would implement a top estate tax rate of 45%, up from the current 40%.
With these potential transfer tax hikes to consider, here are some action plans to discuss with specific clients: