2021 Estate Planning Environment: Part One

June 29, 2021 by Staff
Estate and Gift Taxes

Now that the democrats have control of all three branches, there have been a few estate planning proposals that could significantly alter the estate planning landscape.  Over a series of three blogs, I will discuss:

  1. President Biden’s proposal to treat gifts/death as a realization event
  2. Senator Bernie Sanders’ proposal to change the estate and gift tax laws
  3. Planning ideas people can use to take advantage of the current law before any law changes take place.

The first blog in the series focuses on President Biden’s proposal to treat gifts/death as a realization event.  It is important to note there are other parts of Biden’s proposal that are beyond the scope of this article.

President Biden’s proposal would not change the current estate and gift lifetime exemption (currently $11.7 million per person, indexed for inflation).  Rather, his proposal treats transfers of appreciated property by gift or on death as realization (taxable) events for income tax purposes.  This means the donor/decedent could realize a capital gain on the difference between the asset’s fair market value and the donor/decedent’s basis in the asset on the date of gift/death.  Each person would receive a $1 million exclusion before he or she would have to realize any capital gains.  The two examples below illustrate how this would work:

Example 1:  Donor gifts real estate to his son that is valued at $1.6 million dollars and has a basis of $100,000.  Assuming the donor has used none of his $1 million dollar exclusion, the donor would use all his exclusion and realize a $500,000 capital gain.

Example 2: Decedent dies with appreciated property worth $5 million dollars and has a basis of $3 million dollars.  During his life, the decedent used $500,000 of his $1 million dollar exclusion gifting assets to his children.  At his death, he would realize a $1.5 million dollar capital gain.

Transfers to spouses and charities would not cause realization events.  Additionally, transfers of certain small business stock and family businesses would not cause realization events.  Any income tax triggered at death under Biden’s rule would be deductible for estate tax purposes.

This is a significant departure from the current law.  Currently, gifts generally do not cause realization events.  At death, there is no realization event, and the decedent’s assets (with a few exceptions) receive a step-up (or step-down) in basis to their fair market value at the decedent’s death.

Biden’s proposal significantly limits the effectiveness of many estate planning strategies.  Luckily, this part of his proposal (treating death/gifts as a realization event) would not be effective until 2022.  This means there should still be time to discuss with your advisors whether to implement any potential planning before his proposal becomes effective.

The second blog in this series will focus on Bernie Sanders’ proposal.


This correspondence is for general information purposes only and does not constitute legal, accounting, or other professional advice. The information contained herein is not related to any individual situation or concerns and should not be relied upon or used as the basis for making decisions without consulting competent legal, accounting, or other professional advice regarding implications of a particular factual situation.