Act now – property tax planning below the Biden administration

Act now – estate tax planning under the Biden administration

Over the previous twenty years, there was a dramatic change within the property tax legal guidelines. Given the Democratic management established in Washington, D.C., further property tax reform is now a definite chance. 

Presently, every individual may give away throughout lifetime, or distribute at dying, an quantity of $11.7 million with out being topic to federal property tax. That top exemption quantity might change below the Biden administration. Now could be the time to talk along with your advisor about decreasing or eliminating your publicity to property tax.[1]

Present property tax legal guidelines
In 2001, the federal property tax exemption quantity [2] – the quantity an individual can present throughout lifetime or switch on the time of dying – with out being topic to property tax was $675,000. The highest property tax price was 55 %. 

In 2010, the property tax exemption was drastically elevated to $5 million per individual, topic to inflation will increase, and the property tax price was dropped to 35percent. The tax price elevated to 40perfent in 2013 and has remained at 40percent ever since. Below the Tax Cuts and Jobs Act of 2017, the property tax exemption was doubled to $10 million per individual, topic to inflation. In 2021, every individual has an exemption of $11,700,000. 

Because of the sundown of the Tax Cuts and Jobs Act, the exemption quantity will drop to $5 million per individual in 2026 until the legal guidelines are modified previous to that point. Wisconsin doesn’t have its personal state property tax, however some states do have a state property, dying, or inheritance tax.

One other necessary facet to property tax planning is foundation adjustment. When sure property are included in a deceased individual’s property, these property obtain a brand new tax foundation equal to the date of dying worth. 

Retirement accounts and annuities are exempt from this rule, and don’t at the moment obtain a foundation adjustment. For instance, assume John Smith paid $50 per share for his 1,000 shares of Apple inventory. His unique foundation is $50,000. Ten years later, John dies, and the 1,000 shares of Apple inventory are included in his property. On the time of his dying, the inventory is price $130 per share, for a complete of $130,000. If John had offered that inventory throughout his life, he would have been topic to capital good points taxes on $80,000 ($130,000 proceeds – $50,000 foundation). Nonetheless, for the reason that foundation within the Apple inventory elevated to the date of dying worth, if the beneficiaries of John’s property had been to promote the inventory, capital good points tax can be paid solely on post-death good points.

Proposed adjustments below Biden administration
The Biden marketing campaign proposed to scale back the property tax exemption quantity to $3.5 million per individual, and to extend the highest price for the property tax to 45 %. Additional, the Biden marketing campaign proposed to get rid of the premise adjustment for property. It’s not clear whether or not Biden’s plan would end in pre-death capital good points being realized, and subsequently the capital good points tax paid, on the time of an individual’s dying. Alternatively, if a beneficiary inherits the asset however doesn’t promote it on the time of inheritance, Biden’s plan might name for the pre-death appreciation to be preserved till the asset is offered by the beneficiary, and the beneficiary would pay the capital good points tax on each pre-death and post-death good points on the time of sale.[3]

Property tax planning alternatives
One of many easiest property tax planning strategies is to benefit from alternatives below the tax guidelines to make presents with out using your property tax exemption. First, the present tax annual exclusion permits any individual to present to another individual as much as $15,000 annually with out using any tax exemption. Additional, an individual can present as much as 5 years of annual exclusion to create a 529 Account (a particular sort of faculty financial savings account) with out using any property tax exemption. Profiting from this rule, a single individual may fund a university training account with $75,000 on behalf of a kid or grandchild with out having to make the most of any exemption, and a married couple may fund an account with $150,000.

Second, an individual might also pay sure faculty and medical bills on to a 3rd social gathering. For instance, a mother or father pays a baby’s faculty tuition on to the school, and in addition make an annual exclusion present of $15,000 on to the kid in the identical 12 months. Over the course of a few years, these easy gifting strategies may be very efficient at decreasing the scale of an individual’s property, and subsequently decreasing future publicity to property tax.

One other method is to make massive taxable presents. Since 2017, when the property tax exemption was doubled, property planners have suggested excessive web price people to make massive taxable presents to make the most of the shopper’s exemption quantity. The IRS has confirmed that if an individual makes massive presents, and the exemption quantity is lowered in a later 12 months to an quantity beneath the worth of the earlier presents, these presents can be grandfathered and no tax can be due. 

Nonetheless, there’s a chance that adjustments to the tax legal guidelines in 2021 can be retroactive to January 1, 2021.[4] Given the present atmosphere – each that the exemption is about to decease to $5 million in 2026 and the actual chance that the Biden administration will search to scale back the exemption sooner and/or to a decrease quantity – we’re at the moment in a scenario the place the exemption ought to be used, or it might be misplaced. 

Nonetheless, massive presents are a high-risk, high-reward planning alternative. If it seems unlikely that any property tax legal guidelines will probably be handed this 12 months, there once more could also be a rush of people searching for to make massive presents in direction of the tip of 2021.

My colleague’s article, Particular person Tax Planning Following the November 2020 Elections, covers further property tax planning alternatives, together with the execution of trusts (together with people who work properly in right this moment’s low rate of interest atmosphere), and offers further perspective on earnings and capital good points taxes.

Because of doable property tax adjustments below the Biden administration, people ought to assessment their present property plans and work with their advisors on what steps ought to be taken to scale back or get rid of their publicity to property tax.

When you have any questions concerning this text, please contact your Davis|Kuelthau, s.c. legal professional, the writer, or the associated Tax follow group chair right here, or Trusts, Estates and Succession Planning follow group chairs right here.


[1] Whereas the present article focuses on Property Tax planning for people, this article by Legal professional Mark J. Andres focuses on earnings tax planning after the election, and this article by Legal professional Ann M. Rieger focuses on planning for household enterprise house owners after the election.

[2] Whereas this text refers back to the “Property Tax” exemption quantity, this exemption is a unified exemption that covers each lifetime presents and transfers at dying.

[3] The Biden Administration would possible additionally search to decrease the Era-Skipping Tax Exemption, however a dialogue of the Era-Skipping tax is past the scope of this text.

[4]  There’s some precedent in courtroom circumstances suggesting such a retroactive regulation decreasing exemption quantities is constitutional, however the exact concern of a retroactive regulation decreasing the Property Tax exemption has not been determined.



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