Kamala Harris’ support for Senator Elizabeth Warren’s proposed estate tax changes could drastically reshape how estate taxes are applied, beginning in 2025. These significant changes include drastically reducing the estate exemption amount, eliminating the estate step-up in basis, and lowering the gift tax exemptions.
Proposed Estate Tax Rates:
Under the current system, estates valued up to $13.6 million ($26 million for married couples) are exempt from federal estate taxes. The new proposal aims to slash this exemption threshold to just $3.5 million! Additionally, the tax rate will shift from a flat 40% to a staggering progressive rate: 55% on estates valued up to $13 million, 60% on amounts over $13 million, and a shocking 65% on those exceeding $93 million!
What Does This Mean for You?
Consider this scenario. You own:
House valued at $700,000
Term life insurance of $1 million
Business valued at $4 million
401(k) valued at $250,000
Rental properties valued at $650,000
Your children could face a whopping $1,705,000 in estate taxes! How will they manage it? They’ll likely have to liquidate your life insurance or sell the house, or worse, they might have to sell your business for a fraction of its worth to pay the estate taxes!
Cost Basis Issues:
Another critical change involves how inherited assets are valued. Currently, the "step-up" in basis allows heirs to reset the cost basis to the fair market value at the time of your passing, minimizing capital gains taxes when sold. Warren’s plan would eliminate or significantly reduce this benefit, leading to higher capital gains taxes for your heirs.
Using the previous example: if you bought your home for $350,000, your kids would inherit it at the stepped-up value of $700,000 under current law, selling it tax-free. But under the proposed plan, they inherit it at $350,000, triggering a hefty capital gains tax. They might need to sell even more assets to cover your $1.7 million estate tax!
Gift Tax Changes:
Warren’s plan also aims to lower the lifetime gift tax exemption from $13.6 million and annual exclusions from $18,000 per person to just $10,000 per person and $20,000 total per donor. This reduction means that more gifts made during your lifetime will now be subject to taxes at higher rates! Want to gift your grandchild a car or contribute to a college fund? You’ll now be limited to just $10,000 per grandchild each year and a maximum of $20,000 for all!
Impact on Estate Planning:
These proposed changes will have major implications for your estate planning, especially if you're a business owner or hold significant life insurance. Americans will need to urgently reassess their estate plans to navigate lower exemption thresholds, higher tax rates, and the possible removal of the step-up in basis. This could lead to an increase in lifetime gifting, the establishment of trusts, and other advanced planning strategies to minimize tax liability.
While the intent behind these changes is to combat wealth inequality and fund social programs, they will undoubtedly complicate estate administration and prompt more aggressive tax strategies. Expect a surge in demand for estate and tax attorneys, accountants, and insurance professionals as families rush to adapt before the January 1, 2025 deadline!
Don’t wait! If you have questions or want to get a jump start on your estate planning before these changes take effect, call us today!
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