Posted in Triplett & Carothers on September 27, 2020
We have never experienced a year like 2020 with the difficulties presented by COVID-19 and the resulting volatility in the financial and employment markets. As the 2020 presidential and congressional elections approach, the potential for change in the White House and in Congress raises additional uncertainty as to how estate, gift, and income taxation laws will change in the coming years.
Wealth Transfer Taxation (The Estate Tax)
In 2011, Congress set the estate, gift, and generation-skipping transfer (GST) tax exemption amount at $5 million per individual ($10 million per married couple), adjusted each year for inflation. In 2017, in response to President Trump’s call to repeal the estate and gift tax, Congress compromised and passed legislation temporarily doubling the exemption amounts until the end of 2025, when the legislation is scheduled to sunset (expire). In 2020, an individual may make $11.58 million, and a married couple may make $23.16 million, in lifetime or testamentary (at death) transfers without being subject to the 40 percent wealth transfer tax. What that means is that couples do not need to worry about the estate tax unless their estate is worth over 23 million.
With the upcoming election and potential Democratic reform, these all-time high exemption amounts may be decreased sooner than the scheduled sunset in 2026. Presidential candidate Joe Biden has indicated support for a policy to raise the estate taxes back to the historical norm, which may be achieved by lowering the exemption amounts to a base of $3.5 million (last seen in 2009), $5 million (last seen in 2011), or some other reduced amount determined by Congress, and by increasing the tax rate from the current 40 percent to possibly 65 percent or higher.
If those things happen, that means that couples will need to do tax planning in their estate plans if they have estates in the $3 – $5 million range.
Income Taxation
Following the election, taxpayers may also lose the major benefit of full step-up in basis adjustment at death, which effectively reduces or eliminates capital gains for their heirs. Unlike property or other assets gifted during the taxpayer’s lifetime, which retain the taxpayer’s carryover basis (the basis at the time of the lifetime transfer), an asset transferred at death to a deceased taxpayer’s beneficiaries receives an adjustment to make the basis equal to the fair market value of the asset at the taxpayer’s death. Presidential candidate Biden has proposed limiting or eliminating the stepped-up basis, a longtime taxpayer benefit.
If there is no step-up in basis, then heirs of an estate will have to pay the capital gains taxes on assets that they inherit. This, too, will require additional planning for all estates, regardless of whether they are subject to the estate tax.
Planning Opportunities
It may be prudent to act now to take advantage of the current wealth transfer and income tax laws. The Internal Revenue Service has taken the position in a revenue ruling that, if the exemptions are reduced after 2026, it will not penalize taxpayers who took advantage of the existing estate, gift, and GST tax exemptions before the reduction by clawing back transferred assets into the taxpayer’s taxable estate. Taxpayers must now use it or lose it to avoid missing out on millions of dollars worth of wealth transfer tax savings.
If you wish to minimize the taxes due at your death and would like to discuss these strategies in more detail, or if you have not updated your estate planning documents recently, it is crucial that we schedule a meeting to review your estate plan. We will not only ensure that the documents are appropriate under current laws, but also take steps to protect you from future changes in legislation that may negatively impact your estate.