While the end of the calendar year often elicits tax and estate planning questions, the political uncertainty in 2020 has led to an increase in inquiries on the subject. One real estate appraiser in Manhattan told a news outlet before the Nov. 3 U.S. presidential election that he had fielded three times as many calls about estate planning than usual, and other financial advisors reported a similar increase in questions.
Now, with the Democratic Party poised to control the U.S. House of Representatives and the presidency in January, it’s possible that estate planning rules could change. Here’s a look what you need to know:
Tax Cuts and Jobs Act
Signed into law in late December 2017, the Tax Cuts and Jobs Act represented the largest revision to the federal tax code in 30 years. Many viewed the overhaul as favorable to wealthy individuals and corporations, as it reduced the top corporate tax rate to 21% and doubled the amount of assets that an individual could transfer before federal estate and gift taxes take effect to approximately $11.6 million in 2020 for individuals and about $23 million for married couples. Any assets transferred over those amounts can be taxed at a rate as high as 40%.
While Joe Biden, the winner of the 2020 presidential election, has not yet taken office, he has given some indications as to changes to the estate tax rules that he will support. The 2017 exemptions will expire in 2025, and they will decrease to an individual maximum transfer amount of around $5 million, although it appears that under Biden they could end sooner.
According to the Tax Policy Center, Biden’s plan will reduce the amount of assets an individual can transfer tax-free when they pass away to $3.5 million and cap individual gifts at $1 million. Estate taxes on gifts and estates also could increase to 45%.
Biden also has suggested he is interested in eliminating a tax code provision known as “step-up basis” that would exempt heirs from paying taxes on gains accumulated before the estate holder’s death. This means that an heir could sell an asset immediately after the estate holder dies and likely pay no or few capital gains taxes on it.
Overall, Biden’s potential changes would mean that people could transfer fewer assets without paying estate taxes.
How to Respond
Tax advisors and financial planners are providing plans and advice for maximizing an estate during these uncertain times.
Take advantage of current rates—For clients concerned about potential changes to estate tax provisions in 2021, one option is to transfer assets now before the high exemption rate potentially drops. One drawback to early gifting, however, is that your own net worth will decrease as you begin transferring large amounts to your heirs. For example, if you’re worth $16 million, then transferring $10 million now to avoid estate taxes could have an adverse effect on your own finances. Financial experts advise considering whether you can actually afford the gift now, and if you do transfer the assets, how that will impact your life. It may be worthwhile for your heirs to pay more in estate taxes in order to maintain your current financial situation. “Giving these assets away could leave you financially vulnerable, and this is so important to consider—especially now, in the time of COVID, when there is so much uncertainty,” Stacy Francis, a financial planner based in New York City, recently told Kiplinger. “While saving on taxes is extremely important, it’s not the sole reason to give money away to charity or family members.”
Worry less about step-up basis changes—While eliminating step-up basis could help to fund Biden’s initiatives and proposals, in actuality it could prove to be a logistical nightmare. Financial experts say that while the idea has been circulating in Washington for several years, changes to the tax law have never been enacted because of the amount of paperwork that it would require and its potential impact on taxpayers. Easier and more traditional changes that also could increase revenue include expanding capital gains taxes and reducing the estate tax exemption.
Be patient—While the fate of the current estate tax exemptions is uncertain, you can begin distributing your estate tax-free to your heirs through smaller gifts. The current rules allow individuals to give away $15,000 tax-free each year to individuals. This means that you could gift each of your children and grandchildren that amount with no tax penalty, and your spouse could do so, as well. You may also opt to move your estate to a trust, which could provide greater stability for your assets. Regardless of how you manage estate planning, financial advisors recommend choosing a strategy that fits your needs and long-term plans. Most importantly, they say, people should work with a financial advisor on estate planning and avoid panicking when times become difficult.
President-elect Biden will need the support of Congress to enact major changes to the federal tax code. That means that he’ll likely need a Democrat-controlled Senate, and that hangs in the balance right now. Both of Georgia’s Senate seats will be decided in run-off elections in early January, and the outcome will determine the balance of power in the Senate. If both of the Democratic candidates win, the Senate will be evenly split, and Vice President-elect Kamala Harris would break the tie.