Presidential candidate Kamala Harris proposed significant shifts in the estate tax system that could impact anyone with wealth to pass on to future generations. Understanding these proposed changes is essential for protecting your financial legacy for your family. This article explores the key aspects and implications of these proposed changes.

What are the Proposed Changes?

Lower Estate Tax Exemption: 

What is this? 

The estate tax exemption is the amount of wealth you can pass to your successors without paying federal estate taxes. This includes your home, investments, retirement accounts, and any other assets you may leave behind.

Current Posture:

As of 2024, the estate tax exemption is $13.61 million for individuals and $27.22 million for married couples. If your estate is below those amounts, you won’t owe any federal estate taxes.

Proposed Changes:

The Harris campaign is proposing to lower this to $3.5 million for individuals and $7 million for couples. Estates over those amounts would be taxed, which means more estates would be subject to federal estate taxes.

Higher Estate Tax Rates: 

What is this?

Estate tax rates determine how much of your taxable estate (the part that exceeds the exemption) is subject to federal tax. The rates increase as the value of your estate increases.

Current Posture: 

The current top estate tax rate is 40%. So, any amount over the exemption gets taxed at this rate for larger estates.

The proposed change:

Under the Harris campaign’s proposal, the top estate tax rate could rise significantly, with potential rates of 55%, 60%, or even 65% depending on the value of the estate. For example, an estate worth over $1 billion could face a 65% tax on the amount above the exemption. Estates valued at over $1 billion would also face an additional 10% surtax. This change would have a massive impact on larger estates, reducing the amount successors can inherit without strategic estate planning.

Gift Tax Adjustments: 

What it is? 

The gift tax limits how much you can give away to others, tax-free, during your lifetime. It’s designed to prevent people from dodging estate taxes by giving their assets away before they pass.

Current Posture:

Right now, you can give $18,000 per person, per year without triggering gift taxes, and there’s no limit on how many people you can gift to. 

The proposed change: 

The Harris campaign’s plan would lower the annual gift tax exclusion to $10,000 per person and cap your total annual gifting at $20,000. This would effectively prevent you from spreading your wealth to avoid taxes. The lifetime gift tax exemption would also shrink in line with the lower estate tax exemption, limiting your ability to give away large sums tax-free.

Grantor Trust Restrictions: 

What is this? 

Trusts, especially Grantor Retained Annuity Trusts (GRATs), are a popular way for wealthy individuals to transfer assets to their heirs while minimizing estate taxes. These trusts allow you to remove assets from your taxable estate and pass them to your heirs, often at reduced tax rates.

Current Posture: 

GRATs are widely used today because they allow individuals to pass appreciation on assets to beneficiaries with minimal tax consequences. They are a tried-and-true strategy for reducing taxable estates.

The proposed change:

The Harris campaign proposes placing new restrictions on GRATs and similar trusts, limiting their effectiveness and making it more difficult to shield assets from estate taxes. This means that wealthy families may need to explore other strategies to protect their legacies. If you rely on trusts as part of your estate plan, this change could force a rethinking of your approach

Business Ownership Transfers: 

What is this?

If you own a family business, transferring it to your successors without a big tax bill can be tricky. Current laws allow business owners to transfer ownership with certain valuation discounts that reduce the taxable value of the business.

Current Posture:

Business owners can currently take advantage of favorable valuation rules that allow them to transfer ownership at a lower tax cost, helping family-run businesses stay within the family without a massive tax burden.

The proposed change:

The Harris Campaign’s proposal may tighten the rules around valuation discounts, making it more difficult to transfer business ownership at a reduced tax cost. This could result in higher taxes on family businesses and make it more challenging to pass them on to the next generation without selling off assets to cover the tax bill.

Charitable Giving:

What is this?

Charitable donations have long been used as an effective way to reduce taxable estates. When you make donations to qualified charities, those amounts are generally excluded from your taxable estate.

Current Posture:

Charitable giving is a great way to support causes you care about while reducing the size of your estate, and trusts like Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLATs) help you balance your philanthropic goals with tax planning.

The proposed change:

Under the new rules, charitable giving could become even more attractive. The higher estate tax rates mean that giving to charity may offer even more tax benefits, as donations could help lower your estate’s overall tax burden. Strategic charitable giving will likely be an even more critical part of estate planning if these changes go into effect.

What is the Purpose of These Changes?

The Harris campaign views the estate tax system as a potential revenue source to address housing affordability. The proposed tax changes are tied to the American Housing and Economic Mobility Act of 2024 (the “Act”), which seeks to lower housing costs and improve access to affordable housing for Americans.  More specifically, the Act proposes a $40 billion fund aimed at increasing affordable housing options, expanding rent assistance programs, and incentivizing local governments to change zoning laws. Harris’s plan would use the revenue generated by these new tax laws to provide a significant portion of the funding for these initiatives.

These changes are also part of a broader effort to reduce income and wealth inequality in the U.S. However, many people question whether this is more of a redistribution of existing wealth rather than incentivizing creation of new wealth.  The reduction in the estate tax exemption and the increase in tax rates are designed to promote more contributions to public revenue from wealthier individuals. 

What is the Bottom Line? 

These proposed changes would drastically shift how people and estates are taxed, potentially bringing many more people into the estate tax system. Under current law, less than 0.2% of U.S. estates are subject to estate tax. However, with the exemption potentially dropping from $13.61 million to $3.5 million, many more individuals and families would find themselves liable for estate tax. While it’s easy to think this only impacts the super-wealthy, estates valued above $3.5 million could be affected—especially when considering the combined value of homes, retirement accounts, and investments.

Planning early is key. The best way to protect your assets and your family’s financial future is to act now.  Many valuable tax strategies and techniques are still legal and available. Proper planning under current law is essential.  When the law changes, it may be too late.

If you’d like to discuss how these proposed changes may affect your estate plan, contact our team of experienced estate planning attorneys. We’re here to help you navigate the evolving tax landscape and create a plan that benefits you and your family.