In the world of estate planning, elections can create massive shifts in tax planning. Many estate planners are watching carefully as the 2020 election results are gradually being finalized. This blog addresses how these results will impact and change the world of estate planning and what financial moves might make sense for you.
The Results of the Presidential Election
At this time, Joe Biden appears to have just enough votes to win the Presidency. As a candidate, Biden discussed the possibility of lowering the estate tax exemption amount from $11.58 million per person to $3.5 million per person. The estate tax exemption determines whether or not a person’s estate will pay anything to the federal government upon the person’s death. The estate tax exemption is a unified credit with the gift tax, meaning that you can give away up to the exemption amount during your lifetime or at your death. Biden did not discuss removing portability, which allows married couples to essentially combine their estate tax exemption amount. That means if Biden wins and his tax plan is passed, single individuals with over $3.5 million and married couples with over $7 million in net worth should consider their options.
One option being floated is to gift the full exemption amount before 2021. Because of the unified credit with gift and estate tax, a person could simply give away $11.58 million before 2021 and pay nothing in estate or gift tax. This avoids having to deal with the lower exemption amount at a later time.
Biden has also addressed capital gains tax in his campaign. For individuals with less than $11.58 million in net worth, capital gains tax planning is very lucrative because it can save a family a considerable amount of money. Under our current system, there is a stepped-up basis on death for capital gains tax purposes.
For example, mom buys a house in Los Gatos, CA in the early 1980s for $200,000.00. The property value grows to $2 million in value during her lifetime. If mom sold the house for $2 million before she died, she would be subject to capital gains tax on the $1.8 million in increased value. However, if mom passes away and leaves the house to her daughter, her daughter can sell the house for $2 million and pay nothing in capital gains tax. This is because the basis for her daughter is stepped up to $2 million, or the value of the asset at the date of death for mom.
Biden’s Tax Plan
Under Biden’s tax plan, this stepped-up basis would no longer be available. Further, Biden’s tax plan would tax on the unrealized appreciation at the date of the transfer. So, in our previous example, the daughter is going to get taxed regardless of whether she keeps the house or sells it under the Biden plan. If there is not a lot of cash on hand to pay for that capital gains tax, then the daughter might have to refinance the property or, in some cases, sell it.
Biden plans to increase the capital gains tax to roughly 40% for those who are earning over $1 million annually. For many wealthy individuals, the traditional thought was to hold on to long term investments and leave them to your children. That way your children would get a stepped-up basis and could sell the property, paying basically nothing in capital gains tax. However, many are rethinking this logic and considering selling investments before 2021 to take advantage of lower tax rates.
How the Senate Could Impact Taxes
If Biden plans to pass the tax reforms discussed above, he will need both houses of Congress to approve such a plan. The battle for control of the Senate becomes critical because, with a Senate majority or at least a tie in the Senate, Biden will have to reach across the aisle to get anything passed. As of the time of writing this blog, we do not yet know how the final few Senate races will shake out.
Even if democrats do successfully manage to win the presidency and 50-52 seats in the Senate, there are still questions about exactly how much support Biden’s tax reforms will receive. For example, Senator Joe Manchin from West Virginia and Senator Jon Tester from Montana would both have a say. Democratic senators from conservative states would ultimately be the key to any tax reforms.
In California, Proposition 19 appears to be passing, which may change how parent-child transfers are dealt with by the tax assessor, but this proposition will not go into effect until February 15, 2021. As such, we will discuss Proposition 19 in a future blog.
For now, it is probably wise to wait until the dust settles on the election to make any major moves with your estate. This election may not be resolved until the various election-related court cases are decided.
Nevertheless, you should not wait to get in touch with your estate planning attorney and your accountant. Historically, after consequential elections, estate planning offices receive an extreme surge in calls with clients hoping to make changes before the end of the year. Many estate planners will be so busy that they will stop taking additional clients or updates.
Luckily, the team at JRG Attorneys at Law is one of the largest in Monterey County. Our estate planning practice has the resources to help many clients get ahead of the possible changes headed our way in 2021. If you are interested in setting up an appointment or putting us on retainer, we can be reached at (831) 228-5619 or online. You can also call my direct line at 831-269-7083or email us directly atJLind@JRGAttorneys.com or Anne@JRGAttorneys.com.
Disclaimer: This is neither an endorsement nor condemnation of any proposition or political candidate. The information in this article is for general information purposes only. Nothing in this article should be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or viewing does not constitute an attorney-client relationship. Jeffrey S. Lind is licensed to practice law in the state of California only.
Meet the Author