Joseph R. Biden, Jr. will unseat current President Donald J. Trump in January, making him the 46th President of the United States. With a record-breaking voter turnout and a stressful week awaiting election results, most Americans are now turning their focus to what changes new leadership may bring. One area to review in light of Biden's victory is your estate plan, and specifically estate tax changes that could affect your family.
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 roughly doubled 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 Potentially Mean?
Biden is cited as saying he would 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). Additionally, Biden proposed doing away with the step up in basis which would cause an income tax (capital gain) recognition event on death or sale of the asset. This would impact all taxpayers not just those he considers high income.
What Should You Do to Prepare For a Potential Estate Tax Change?
With Biden winning the election, we could see tax changes - including changes to estate and gift tax exemptions - go into effect as early as January 2021. Of course, this will be dependent on the Senate and House, of which Biden may need to pass such tax legislative changes.
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. With election results officially in, don’t hesitate to reach out to your trusted advisors to determine how your tax obligations may be affected, and what you can do now to prepare.