What impact will Biden's plans have on estate and gift taxes?
This short article provides an overview of the constellations in which a gift or inheritance of assets located in the USA is taxed. It also shows what effects President-elect Joe Biden's planned tax reform would have on inheritance cases and gifts with a connection to Germany.
In the 2020 U.S. presidential election, President-elect Joe Biden also spoke out about the U.S. estate and gift tax. In the following, we will present the current situation with regard to the inheritance and gift tax in the USA. Based on this, we will look at what Joe Biden intends to change and what effects these changes could have for Germans with assets in the USA.
Current legal situation
Inheritance and gift tax - in the case of federal tax - is generally linked to the transferor, i.e. the testator or donor. With the exception of rare individual cases, the nationality and the domicile or center of life of the recipient are thus irrelevant.
A distinction must first be made as to whether the testator (donor) is a U.S. citizen or has his center of life in the U.S., or whether he is not a U.S. citizen and does not have a center of life in the U.S.. Furthermore, a distinction must be made according to the location of the asset that is transferred upon death or in the case of a gift.
Atassets located in the USA applies:
The general Allowance in the event of the inheritance of a US resident or US citizen is currently USD 11,580,000 (equivalent to approx. EUR 9,500,000). If the heir/gift recipient is the spouse, the tax exemption amount is doubled; if the spouse is a US citizen himself, even an unlimited tax exemption applies.
Within the framework of the limited tax liabilityThus, if the decedent is not a U.S. citizen or resident for tax purposes in the U.S., the Allowance The exemption amount in the case of limited tax liability is based (in relation to Germany) on the ratio of the US gross estate to the gross world estate. Special rules apply in the case of spouses as purchasers; if the spouse is a US citizen, an unlimited tax exemption again applies.
The gift tax also provides for an exemption amount of USD 11,580,000 for US nationals and US citizens as donors. Provided that the donor in the USA restricted taxable is, therefore Assets located in the USA the gift exemption amount is USD 15,000 (equivalent to approx. EUR 12,400) and to spouses without U.S. citizenship USD 157,000 (equivalent to approx. EUR 129,500); if the spouse is himself a U.S. citizen, an unlimited tax exemption also applies here.
As soon as in the case of inheritance or donation the Allowances exceeded the excess amount is taxed at 40%.
During the election campaign, Joe Biden talked about restoring the regulations currently in place to 2009 levels. That means:
Lowering of the Tax allowance
Increase the Inheritance tax up to 45
Abolition of the "step-up in basis"
As a result, instead of USD 11,580,000, the exemption amount would now be set atUSD 3,500,000 (approx. EUR 2,800,000) would fall.
In addition, it was announced that the portion exceeding the tax-free amount would in future be paid with45 % to be taxed.
As a third amendment, it is planned to abolish for capital investments of the decedent the so-called "step-up in basis", which applies only in case of death. "Step-up in basis"This means that the heir's fictitious acquisition costs are not carried forward on the basis of the decedent's acquisition costs, but are valued as of the date of death. The consequence is that the possibly increased value of the capital investments is transferred to the heir tax-free.
It would be conceivable to recognize the difference in value between the decedent's acquisition costs and the value on the date of death as a "capital gain" and to taxable. As a result, however, this would lead to double taxation. The second possibility would be the Continuation of the original acquisition costs ("similar to the German "footprint theory"). If the difference in value were to be recognized as a capital gain, these gains would currently be taxed at 20-23.8%. However, Biden also plans to increase taxes on capital gains for top earners up to 39.6%.
President-elect Joe Biden's possible adjustments in the area of inheritance and gift tax would also have an impact outside the USA. They would also have an impact on cases relating to Germany via the double taxation agreement between the USA and Germany. The result would be significantly lower tax allowances with a higher tax rate and the threat of double taxation with capital gains tax.
History shows that few presidents have actually adjusted the estate and gift tax to the detriment of taxpayers. Often, the relevant majorities were lacking. Nevertheless, there is a risk that assets that have been transferable tax-free until now could be taxed much more heavily in the future. The recommendation is therefore to bring forward a transfer of assets located in the United States - ideally before January 1, 2021.
Such a decision should nevertheless be thoroughly examined. Income tax consequences must also be considered. It should also be noted that Germany also has a right of taxation in inheritance and gift cases if the acquirer is a German tax resident.
We therefore do not advise hasty action driven solely by tax considerations, but rather a thorough examination, which can also succeed in the short term.