Federal Estate Tax Exemption
The Federal Estate Tax (FET) exemption is the amount of assets an individual can pass to heirs free of Federal Estate taxes. This applies to both lifetime gifts and transfers at death—as long as the combined total does not exceed the FET exemption. (Note: there may be state taxes imposed which are beyond the scope of this article).
Current Law: For 2021 the FET exemption is $11,700,000 per individual or $23,400,000 for a married couple. The current law is scheduled to sunset at the end of 2025 and for 2026 and beyond the FET exemption would revert back to the 2017 amount of $5,490,000 plus a cumulative inflation adjustment for 2018-2025. An estimate of the 2026 FET exemption could be $6,500,000 per person or $13,000,000 per married couple.
Proposed Law: The Biden Plan (October 2020) reverts the FET exemption back to 2009. Under the 2009 law, there would be a $1,000,000 gift tax exemption and a $3,500,000 estate tax exemption per person. For a married couple that means $2,000,000 of gift tax exemption and $7,000,000 of estate tax exemption. There is some speculation that a new plan might just accelerate the already in-place sunset provision noted above for 2026 to an earlier date.
Capital Gains Tax
An asset that has appreciated in value since purchase is subject to capital gains tax upon sale.
Current Law: An asset passing through an estate receives a so-called “step-up” in cost basis at death. This means that the cost basis of an asset owned by a decedent is “stepped up” to fair market value upon death. The heir(s) would receive the asset with zero unrealized capital gain. If they immediately sold the asset, they would pay no capital gains tax.
Proposed Law: The Biden Plan (October 2020) proposes to tax appreciated property at death. The “step-up” to fair market value would be eliminated. It is unclear if this tax would integrate in some fashion with the estate tax—as a credit or deduction against the estate tax, for example. There also seems to be some discussion about having the unrealized capital gain carry over to the heirs. They would then incur the capital gain tax upon sale. This tax would apply to every estate—including those of the Not-So-Rich.