In early November, we saw record-breaking voter turnout and experienced a stressful week awaiting election results. Now that Joe Biden is our President-Elect, the focus for many high-net worth executives has shifted to what changes the new leadership may bring with regard to their taxes and finances.
We feel it is important to note that the election results for the run-off Senate race in Georgia will more than likely end up determining if the Biden/Harris proposed tax bill can become law. The success of the bill is dependent on the Senate and House majority and since we will not know who is in the Senate until early January, we still need to plan for potential outcomes.
Even though we don’t know when we may see a new tax bill, many of you still have questions about the tax impacts a Biden presidency may have on you and your family. Below we discuss the importance of reviewing your current estate plan in light of potential estate tax changes.
A Reminder About the Tax Cuts & Job Acts (TCJA) of 2017
President Trump enacted the Tax Cuts & Job Acts (TCJA) in 2017. Among other things, this act greatly increased the amount of money a person or couple could pass down to children or charity free from estate taxes. Prior to the TCJA, this number was $5,490,000 for individuals or $11,980,000 for couples in 2017. Any amount gifted or passed on above this amount would be taxed at a rate of 40 percent. Since the passing of the TCJA, the exemption limit has increased to $11,580,000 per person or $23,160,000 for couples.1
This legislation is meant to remain in effect until January 1, 2026 when it would, presumably, revert back to pre-TCJA exemptions levels (adjusted for inflation). Unless President-elect Biden reverses these orders.
What Does Biden’s Win Mean for High-Income Filers?
Biden is cited as saying he’d repeal TCJA benefits for high-income filers – which, in all likelihood, would include the TCJA’s higher tax-exempt limit for estate inheritances and gifts.2 If this becomes the case, this would affect those who may be planning on passing along an estate inheritance greater than $5.49 million (this number is based off of 2017 pre-TCJA numbers, but would be adjusted for inflation).
What Should You Do to Prepare for a Potential Estate Tax Change?
If you are worried this 50 percent drop in the tax exemption limit may affect your future gifting, there are a few things you can do now to alleviate the potential tax consequences. If possible, you could make gifts to your children or charities and use as much of the exemption as you can in 2020 before any tax changes were to go into effect.
In some cases, gifting or selling portions of your estate to certain types of trusts can help to preserve your estate as you prepare to pass it on to children or grandchildren.
Common trust types could include:
- Grantor Retained Annuity Trusts (GRATs)
- Intentionally Defective Grantor Trusts (IDGTs)
- Charitable Lead Annuity Trusts (CLATs)
- Qualified Personal Residence Trusts (QPRTs)
The type of trust you choose to utilize would depend heavily on your unique circumstances, as discussed with your estate planning attorney and/or financial advisor.
Few elections years in history have matched the volatility and uncertainty of 2020.
We are Here to Help
Let us help you determine how your tax obligations may be affected, and what you can do now to prepare. We would enjoy having a conversation with you to discuss what might be best for you and your family.