Election Over? What Now?: The New Horizon in Estate Planning

By Christopher D. Wright  |  November 18, 2020

In the months leading up to the general election, there have been numerous articles written regarding the state of the estate tax assuming the Democrats won both the White House and control of the Senate.

The election has not provided much clarity on the future of the estate tax.  What we do know is that Joe Biden is the President-elect, and the Senate is up for grabs.  The Senate will either remain with the Republicans having a very narrow majority or the two parties will be tied, which really means Democrats will have the majority since Vice President-elect Kamala Harris will be in a position to break all ties.

Realistically there may not be any significant changes in the estate tax in the near future.  The incoming Administration faces numerous challenges, including the COVID-19 pandemic, restoring the economy and dealing with racial injustice at the top of the list.  This does not mean that some type of tax bill will not be introduced, but whether any changes to the estate tax are included is total speculation.

Proposed Changes

Following are some of the President-elect’s proposed changes to the estate tax:

• Decrease in the estate tax exemption, potentially as low as $3.5 million

• Increase in the top estate tax rate to 45%

• Increase in the minimum term for a grantor retained annuity trust (GRAT) from 2 to 10 years

• Elimination of the capital gains tax rate and taxing at ordinary rates

• Elimination of the step up in basis of assets upon death

Again, absent a crystal ball, which if any of these proposals may actually be enacted is nothing more than speculation.

This leaves taxpayers with a potential estate tax exposure somewhat in limbo.  There are still numerous planning opportunities available for high-net-worth and ultra-high-net-worth clients, such as GRATs, charitable remainder trusts (CRTs), spousal lifetime access trusts (SLATs), outright gifts, etc.  The real issue is if the current high estate/gift tax exemption should be used before the end of the current year.  Most commentators would say that the answer is yes, but who should be doing this type of planning?  Basically, anyone with a potential estate tax liability.

Most commentators are recommending that at a minimum, those taxpayers with estate tax exposure utilize the current estate tax exemption, since under most estate tax proposals the exemption is anticipated to decrease to potentially as low as $3.5 million and the maximum tax rate increased to 45%.

Advantages of Gifting Now

• Estate tax savings.  If the exemption is decreased to 3.5 million dollars, the savings could be as much as $3.6 million in estate tax.  The difference in the current exemption of $11.58 million and proposed exemption of $3.5 million is $8.08 million; at a 45% tax rate this results in tax savings of $3.6 million if you utilize the current year exemption.

• No clawback of the exemption used now.  It is not anticipated that any proposed changes to the estate tax would contain a provision that would in effect retroactively take back the benefit of the previously used exemption.

• Appreciation on assets gifted permanently out of your estate.

• Take advantage of any COVID-19 related valuation discounts.

Disadvantages of Gifting Now

• Loss of step-up in basis of assets gifted.

• Loss of control over assets gifted.

In summary, it does seem to make sense to do some gifting before year end to take advantage of the high estate tax exemption.  However, state estate tax considerations will still be of concern since most state exemptions are less than the federal exemption.  If you live in Connecticut, you also need to keep in mind that Connecticut is the only state that currently imposes a gift tax, and the Connecticut exemption is significantly lower than the federal limits.

Even with the potential changes, there are still many planning opportunities available and your advisors at Marks Paneth are here to assist you.

Click here to continue to read Private Client Insights, November 2020.

About Christopher D. Wright