What a Democratic Sweep Might Mean for Estate Taxes

October 26, 2020

If the Democrats end up controlling the House, Senate, and White House,  the following estate tax changes might occur.

The current federal estate tax rate is 40%, imposed on assets above the estate exemption.  The estate (and gift) tax exemption is $11.5M per taxpayer (which means $23M for a married couple, with portability between spouses for unused exemption in the first estate).

At this exemption level, very few estates will be subject to estate tax.

But this might change.  Democratic control might result in an estate tax rate of 50% and an estate (and gift) tax exemption of $5.5M, or less.

Democrats have a plan to eliminate the stepped-up basis rule.  This would mean that (for example) an asset worth $10M with a basis of $1M would retain its $1M basis, rather than being stepped up to $10M.

Democrats also want to combine the elimination of the basis step-up rule with the imposition of a data-of-death tax on the unrealized gain on estate assets.  Using the foregoing example, the proposal would be to tax the $9M of unrealized gain at the date of death, rather than when the asset is later (possibly much later) actually sold.

Planning Thoughts:

One might consider making 2020 gifts, to use the 2020 exemption, before it drops.

Depending on whether the unrealized gain proposal has any traction, a sale of assets to a grantor trust, in exchange for a promissory note, might make sense.  Doing so would get the highly appreciated assets out of one’s estate, so as not to incur a date-of-death tax on the unrealized appreciation.