2020 Election and Your Estate Plan

Over the next few weeks political parties, tax policies and good old fashioned politics will have a profound impact on your estate plan and the planning tools at your disposal.

What can we be certain of?  

Currently, we have record high estate tax exemptions of $11.58 million per person; the estate and gift tax exemptions are unified; 40% top estate tax rate; and grantor trust planning and valuation discounts are powerful tools that can be utilized to slash your taxable estate and avoid unnecessary tax dollars going to Uncle Sam. 

The current law stays in effect through December 31, 2025.  On January 1, 2026 the American taxpayer will lose over $6 million in federal estate tax exemption which equates to $2.4 million in additional estate taxes.  Let that sink in – New Year’s Eve 2025 a $12 million estate is nearly non-taxable and on New Year’s Day 2026 the same estate has a $2.4 million tax obligation.

How does the election impact the current law?

Taxes are clearly a point of contention in the upcoming election, and a change in the Oval Office or a change in Congress could result in significant changes. However, before looking at the “Off-the-Shelf” proposal which could be headed our way, we need to ask the question: “where is the American tax policy headed in light of the economy, social policy and needs?”

Politics and tax policy swing like a pendulum from one extreme to the other over time. Thanks in large part to the 2017 Tax Cut and Jobs Act, the United States tax policy is heavily favored towards the taxpayer, particularly in the context of income tax and transfer tax. 

Combine this with the ever-increasing federal debt obligations and budget deficit, and the future of the current taxpayer centric policy is unlikely to continue. We could make the future of American tax policy look particularly grim if we look at the historical extremes of federal tax policy in the opposite direction.

Under the current circumstances, we can reasonably assume that the federal government will begin to increase taxes, particularly if there is a change of control in the White House or Congress.  

Further, the tax increases will occur in areas where those in power can assure themselves of both favoring the federal government and meeting the popular political concerns – i.e. tax the “wealthy.” 

We have already seen efforts to increase tax revenue in the current administration with the Secure Act (enacted December 20, 2019). The revenue provisions of the Secure Act, in effect, limit the vast majority of all non-spouse beneficiaries a 10-year mandatory withdrawal period, forcing all non-spouse beneficiaries to pay the full federal income tax obligation of their tax-deferred retirement benefits within 10 years. 

When it comes to retirement accounts, Congress is borrowing from Jerry Maguire and screaming – “SHOW ME THE MONEY!”  It is no longer willing to wait for non-spouse beneficiaries to withdraw the account over their lifetime, and this is indicative of other tax initiatives to follow.

What would a regime change mean for your Estate?  

In the federal estate and gift tax arena, we do not have to look far to find the Democratic tax proposal.  As part of a prior estate tax bill proposed to Congress by Sen. Bernie Sanders, the “Off-the-Shelf” proposal is to: 

• Reduce the federal estate tax exemption to $3.5 million;
• De-unify the estate and gift tax exemptions, leaving $1 million gift tax exemption
• Increasing the estate and gift tax rate to 55%
• Eliminate valuation discounts; and 
• Eliminate grantor trust planning. 

These are significant and dramatic changes and would significantly limit the ability to reduce taxable estates and save tax dollars.

Democratic presidential candidate Joe Biden has not officially provided his estate and gift tax policies, and one would presume his administration would fall in line with the Off-the-Shelf proposal created by Sen. Bernie Sanders.

Vice President Biden has given some insight into his views on the income and transfer tax system.  His platform favors: 

• Eliminating the “step-up” in income tax basis that is currently permitted for all inherited assets; 
• Raising the capital gains tax rate from the current 20% rate to the ordinary income rate; and
• Increasing income tax rates for individuals and corporations.

Considering the “Off the Shelf” Proposal and Vice President Biden’s proposals together, an estate would potentially be subject to a $3.5 million estate tax exemption and no “step-up” in basis. 

For an estate that is currently on the cusp of being taxable, the changes are drastic.  The loss of $8.5 million in tax exemption equates to $4.25 million in estate tax.  The estate would likely be required to sell assets to satisfy its estate tax obligation.  Because there would be no increase in income tax basis and all gains would be taxed as ordinary income, the result is a potential 45% income tax assessed on the assets sold to pay federal estate tax!

Given the potential for such significant and dramatic changes to the estate tax, it behooves taxpayers to utilize the powerful estate planning tools that are currently available to us. 

Simple gifting strategies to utilize the elevated estate tax exemption and utilizing grantor trusts and valuation discounts to freeze and reduce your taxable estate could result in a multimillion dollar tax savings. Further, a solidly executed and well maintained estate plan can provide security and legacy planning of immense value, irrespective of the tax benefits associated with planning.

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