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Cover Your Financial Planning Now Before It’s Too Late

By August 6, 2020August 23rd, 2021No Comments

The Current Regime.

As a result of the Tax Cuts and Jobs Act of 2017, the federal estate and gift tax exemption is the highest it has ever been. Under the current law, an individual can transfer up to $11,580,000 in 2020 (and a married couple can transfer up to $23,160,000) over the course of their lifetime or upon their death, free of the unified federal estate and gift tax. Any amounts gifted during life or transferred upon death in excess of the available federal estate and gift tax exemption are subject to a top marginal rate of 40% in federal estate tax at death, plus any separate state level transfer tax that may be imposed by the decedent’s state of domicile. A separate and additional generation-skipping transfer (GST) tax of 40% is imposed on transfers in excess of the exemption amount that are made to grandchildren or more remote descendants.

Historical Estate Tax Exemption May Not Last.

These current federal estate, gift, and GST tax exemption levels were never intended to be permanent. Even absent future action by Congress, the exemptions are scheduled to revert to pre-2018 levels beginning January 1, 2026, i.e., $5,000,000 per individual or $10,000,000 per married couple (with an inflation adjustment). 

Impending Political Impact.

Depending on the results of the upcoming election, change may be more drastic and may occur as soon as 2021. Former Vice President Biden’s recently released economic plan calls for the “wealthiest Americans [to] shoulder more of the tax burden,” including reducing the estate and gift tax exemption amount “back to the historical norm.” 

Based on Biden’s tax proposals, the following are potential changes and planning opportunities to consider:

  • There is a possibility that new legislation could be retroactive to the beginning of 2021. New legislation that raises taxes would only require a 50 Senate vote–with the Vice President tiebreaker.
  • The estate/gift tax lifetime exemption could be reduced to $5,000,000–or even $3,500,000–in 2021. There may also be higher estate/gift tax rates.
  • The proposals include elimination of the Code Sec. 1014(a) basis step-up at death.  
  • Individual income tax proposals include restoration of the 39.6% marginal tax rate for income over $400,000, a restoration of the 3% PEASE limitation on itemized deductions for income over $400,000, and a limitation on itemized deduction to a 28% tax benefit.
    • This is a good time to consider Roth conversions.
  • The proposals include the elimination of the preferential capital gains rate (20%) for capital gains and qualified dividends over $1,000,000.  The long term capital gains and qualified dividends over $1,000,000 would be taxed at a 39.6% rate.  
  • The proposals would include an increase in the corporate tax rate from 21% to 28%.  Also, the proposals include a new C-Corp. Minimum Tax, and a doubling of the “GILTI” tax rate for repatriated income.

Plan Now Before It’s Too Late. 

We suggest that clients have alternative plans in place before the end of the year that can be adjusted based on the outcome of the election. There is likely to be a rush on estate planners, limiting what may be accomplished. It is our suggestion that you consider accelerating any estate and tax planning to the earliest possible date. It may be too late for effective planning should Biden win the election and enact tax changes.

Here are a few articles on Former Vice President Joe Biden’s Tax Proposals: