05th May 2021 by Andrea Solana, CFP™

Proposed US Estate Tax Changes

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Within this article, Andrea Solana, Partner and Head of Advanced Planning at MASECO, discussed the proposed US Estate Tax Changes following President Biden's "American Families Plan", delivered on Wednesday 28th April, a strategy to invest in families, children, and workers.


As soon as it became apparent that there would be a change in administration from Republican Trump to Democrat Biden there has been ongoing discussion regarding potential changes to the existing US tax landscape.

Under the changes implemented by the Trump Administration, US domiciliary resident individuals became entitled to an individual lifetime gift and estate tax allowance of $11.7 million (2021).  But this increase (from the prior indexed valuation of $5.0 million per individual) was put in place for a distinct period with allowances set to revert to the previous indexed levels at the end of 2025.  

On Wednesday 28th April President Biden delivered the “American Families Plan”, a strategy to invest in families, children, and workers.  This plan has a cost attached, so President Biden is proposing a shake-up of existing tax legislation to partially fund the plan.  According to The White House release, it will be a tax reform “that rewards work – not wealth”.

With that in mind, it is important to understand what any proposed changes may look like to determine whether there may be actions that should be considered.

We believe that the most relevant proposed changes are as follows(1):

  • Top rate of income tax rises from 37% to 39.6%.
  • Capital gains tax rate and qualified dividends at 39.6% for those with income in excess of $1m.
  • An elimination of the cost basis uplift on assets transferred at death for gains greater than $1m per individual (or $2.5m per couple if one includes the property exemption). unless said assets are subject to estate tax prior to the transfer.  
  • “Carried interest” will be taxed at income rates, rather than capital gains tax rates
  • Deferral of capital gains tax on property exchanges will be limited so gains in excess of $500,000 can be taxed.
  • A separation of the current alignment of the gift and estate tax allowances, with a lifetime gift tax allowance of $1.0 million.
  • A change in the rate of tax from 40% to 45% for estates worth between $3.5 million and $10.0 million with the rate of tax increasing to 50% for estates worth between $10.0 million and $50.0 million.
  • Limiting the allowances available on transfers made in and out of trusts.

Contrary to expectations, there are no changes to the $11.7m estate tax allowance at this time.  It has previously been confirmed that if an individual utilises the current $11.7m exemption during their lifetime then there would be no risk of a future ‘clawback’ should the legislation change in the future.  This means that if someone chose to give away an amount in excess of any new revised lifetime allowance before any change is enacted, then they would not lose the benefit of the gifts previously completed.

There is no mention of effective dates for these proposals, but we expect further updates in due course.  If you would like to discuss how any of the proposed changes may impact you and determine whether any action might be suitable based on your individual circumstances, also considering any relevant UK IHT planning, you should contact your Wealth Manager to discuss.

(1) https://www.whitehouse.gov/briefing-room/statements-releases/2021/04/28/fact-sheet-the-american-families-plan/

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