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Over the last year, there have been a lot of sleepless nights for estate planning attorneys and tax advisors over President Biden’s proposed changes to Estate Tax Laws found in the initial version of the Build Back Better Act.
Biden’s Two Major Proposed Changes to Federal Estate Tax Law in the Original Build Back Better Act
The originally proposed Build Back Better Act would have made two major changes (along with others) to Federal Estate Tax Law:
Biden Proposed Estate Tax Change No 1: Eliminating the ‘’step-up” in Basis for unrealized gains over $1 MIL when a single taxpayer dies or unrealized gains over $2 MIL for joint filers Under the current law, if someone purchases an asset for $1,000, then 20 years later sells the asset for $10,000, consequently there is a $9,000 gain on the property that would be subject to capital gain tax. However, if someone buys an asset for $1,000, keeps that asset for the rest of their life, and then transfers the asset to someone upon their death - the basis for the asset is “stepped up” to the $10,000 value at the time of the original owner’s death. There is no unrealized gain for the new owner to pay capital gains on if they were to sell the Property for $10,000. Biden proposed to eliminate the “step up” in basis for gains over $1 MIL for a single taxpayer and $2 MIL for joint filers.
Biden Proposed Estate Tax Change No 2: Reducing the Unified Tax Credit and Lifetime Gift Tax Exclusion from $11.7 MIL to $6 MIL
Federal Law currently allows a taxpayer to gift up to $11.7 MIL either during their lifetime or at the time of their death without having to pay a federal estate or gift tax. This is called the “Unified Tax Credit and Lifetime Gift Tax Exclusion”. Currently, when someone dies and their estate is over the $11.7 MIL, then the federal government will tax that estate 40% of the amount over the $11.7 MIL exemption amount.
For example, if someone had a $12.7 MIL estate when they died, then they would be $1 MIL over the exemption amount. That $1 MIL would be taxed at 40% or $400,000.
Note that a taxpayer can give up to $15,000 per year to any number of individuals without having to report this gift to the federal government or pay any gift tax. This $15,000 amount is called the “Annual Gift Tax Exclusion Amount”.
If a taxpayer gives more than the $15,000 to any one person in one year then the taxpayer will have to report that gift to the IRS and this gift amount WILL REDUCE the total Unified Tax Credit and Lifetime Gift tax Exclusion Amount.
The Gift and Estate Exemption Amount was only $5.49 MIL, but in 2017 a law was passed to double that amount which results in the current $11.7 amount for 2021.
Biden’s proposal would reduce the Gift and Estate Exemption amount from the current $11.7 MIL back to the 2017 amount (adjusted for inflation) to $6 MIL.
Status of Two Major Changes to Federal Estate Tax Law
These two major changes to federal estate tax law appear to be dead. The House passed a new version of the Build Back Better Act on November 21, 2021, that did not include either of these two Major Estate Tax Changes discussed in this Article.
The entire Build Back Better Act appears to be in jeopardy as Senate Republicans vow to filibuster the bill and Senate Democrats don’t seem to have the votes to break a Republican filibuster.
It is highly unlikely that that the Build Back Better Act will be passed this year, and if it does- it is highly unlikely to include either of the two Major Estate Tax Law changes discussed in this Article.
The Estate Tax Law Outlook for 2022
The federal estate tax laws for 2022 will look like:
The Federal Unified Tax Credit and Lifetime Gift Tax Exclusion will be $12.06 MIL. This increase from $11.7 MIL is due to an inflation adjustment. If someone dies in 2022 their estate will not be taxed as long as long as it is under the $12.06 MIL Exclusion Amount.
The Annual Gift Tax Exclusion Amount will be increased from $15,000 to $16,000 per year. This means that a taxpayer can give up to $16,000 per year to any individual without having to report this gift to the IRS.
The “step-up” in basis at death remains intact. Assets transferred at someone's death will continue to receive a “step-up” in tax basis.
Important things to keep in mind about Estate Tax Planning:
In addition to the Federal Estate Tax, Illinois residents are also subject to an Illinois Estate Tax. Illinois has a $4 MIL Estate Tax Credit; therefore, any Illinois resident that has an estate approaching $4 MIL needs to address estate taxes as part of their estate planning even though their estate is less than the $12.06 MIL (2022) Federal Estate Tax Credit.
The $12.06 MIL Estate tax credit will be adjusted every year for inflation until 2025. On January 1, 2026, the Federal Estate Tax Credit will automatically revert to the previous Estate Tax credit law and amounts. Congress would need to pass a law to extend the current larger estate tax credit amount beyond 2025.
Conclusion
If you are an Illinois resident and your estate is approaching or worth more than $4 MIL, you should talk to an estate planning attorney to see how you can effectively reduce or eliminate the Illinois estate tax as part of your estate plan.
Even if your estate is under the current $12.06 MIL Federal Estate Tax Credit, you need to make sure your Estate Plan takes into consideration the fact that the current $12.06 MIL Federal Estate Tax Credit will revert back to about $6 MIL on January 1, 2026 (unless Congress passes a law to extend the current estate tax credit amounts).
Estate tax law remains a hot topic in the current political environment. This area of law continues to be fluid with anticipated future legislative proposals.
This article is a service of Attorney Chad A. Ritchie and the Ritchie Law Office, Ltd.
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