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Estate Planning for Possible 2021 Changes: The Time to Act is Now

With the 2020 election right around the corner, estate planning experts are evaluating what the outcomes may mean. No matter which party wins in November, it seems certain there will be pressure to raise taxes. Estate taxes are likely to receive particular attention.

On July 14, Joe Biden started to float some tax concepts that his administration will try to implement if elected. The plan at this point is still very general, containing concepts more than specifics. But as to estate and gift tax; reductions are possible in the estate and gift tax exemption, higher tax rates when tax is assessed and the possibility that the current step-up in tax basis at death will somehow be eliminated. All of these pose detrimental effects to those with net worth of more than about $5M.

A Trump administration would like to make the changes enacted in the Tax Cuts and Jobs Act permanent, but that goal is likely to be met with fierce opposition. The economic effect of the current pandemic will create pressure to raise revenue in ways that affect the fewest American's possible.

Act Now

Individuals having more than $5M of accumulated wealth need to consider action now. Many of the changes being considered could be implemented very early in 2021, so action in 2021 may be too late. Taking action now, during 2020, will ensure the most important benefits of current estate tax law are captured. We also anticipate a wave of planning during November and December once election results are known. Many strategies take time to implement so waiting may limit your options.

Possible Changes

Presently an individual having an estate of nearly $12M pays some NYS estate tax, but no federal estate tax. The Biden plan may lower this amount to $5M, or at least that is a best guess at this point. Many more individuals are likely to be subject to the estate tax.

The estate tax rate, presently 40 percent when applied, is also planned to be increased, some say as high as 60 percent. This is potentially a 50 percent increase in tax cost for estates above $5M.

The Biden plan also introduces the possibility that the long-standing step-up in tax basis at death will go away as well. Present law allows an asset that originally cost $100,000, and has appreciated to $1M as of date of death, to be passed to heirs with a new tax basis of $1M. There is no income tax assessed on the $900,000 of gain accumulated during one’s lifetime. The Biden plan speaks to collecting a tax on this built up gain, either from the estate itself or from the heirs when the inherited asset is eventually sold.

Dove-tailing into this, the income tax plan contains a proposal to eliminate the capital gains tax rate of 20 percent on large capital gains, taxing large capital gains at ordinary tax rates, maybe as high as 39 percent. Arranging the timing and size of potential gains would become a vital aspect of one’s estate plan.

The Economic Climate

The Biden plan remains a work in progress, but we have been given a warning shot. The election result is most certainly unknown but the economic challenges the country will face during recovery are certain. Limiting planning techniques using certain types of trusts and valuation discounts has long been discussed. Dramatic changes may be looming, and they deserve close consideration. We are also in an extremely low interest rate environment and the value of certain assets may be depressed due to the pandemic. Those two factors mean that wealth may be transferred to the next generation more efficiently now than they would have been a year ago.

The time is now to meet with your tax advisor and consider your options. If you have questions or would like to further discuss, don’t hesitate to reach out to our estate planning experts today.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute an accountant-client relationship.