The Biden Tax Plan – Will It Be Retroactive? What This Could Mean for 2021 Estate Planning

February 19, 2021

There has been a lot of speculation about the new Biden tax plan and whether it will be enacted with retroactivity causing the new legislation to take effect on January 1, 2021. The start date matters because high net worth individuals are looking for ways to maximize the federal estate tax exemption allowed under the Trump administration. If these individuals start gifting amounts allowed under the previous legislation and the Biden policy is enacted with retroactivity, this gifting strategy could backfire with seriously expensive consequences. So what should high net worth individuals do?

First, let’s look at the likelihood of the Biden Plan getting enacted. The Democrats control both the House and the Senate, including their tax-writing committees, although it is very close in the Senate with Democrats only holding 50 seats. It typically takes 60 votes to avoid a filibuster and pass the tax legislation. There is another way forward. A process, referred to as budget reconciliation, allows for tax legislation to move forward with a simple majority vote. VP Harris then gets that tiebreaker vote. So, it is probable that the Biden Plan will advance under the budget reconciliation process.

Next, we have to consider the likelihood of retroactivity. As stated earlier, the enactment date of the Biden Plan is very important for estate planning strategies. The Biden Plan intends to decrease the federal estate tax exemption significantly - from $11.58 million to $5 million per individual. Some have even speculated the exemption amount may decrease even lower to $3.5 million per individual. Furthermore, the Biden Plan may include repealing the step-up in basis on death and tax unrealized capital gains at death at a higher tax rate. These changes have the ability to impact any gifting strategy implemented after January 1, 2021, if the laws become retroactive. Depending on how long it takes for this legislation to pass, the enactment date may not be until January of 2022. This would allow high net worth individuals an entire year to implement a gifting strategy.

Given all of this uncertainty, what is the best plan of action? Experienced estate planning attorneys can offer some creative strategies to mitigate the risks. One such strategy is known as disclaimer planning. It allows one beneficiary of a trust to disclaim on behalf of all trust beneficiaries. This provides a time buffer to wait out the Biden Plan’s enactment date and still disclaim or “return” the gift.

In these uncertain times, getting sound advice from a knowledgeable team of estate planning attorneys is crucial to protecting your assets. You can schedule an appointment with Stouffer Legal in the Greater Baltimore area by calling us at (443) 470-3599 or emailing us at office@stoufflerlegal.com.

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