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Estate Planning for After the Election

U.S. Election day outcome could result in significant changes to current tax policies


BY: Chris Kelly, JD
Market President, Nashville
(615) 599-9863

There is truth in Founding Father Benjamin Franklin’s famous quote written in a letter  to a friend, “… but in this world, nothing can be said to be certain, except death and taxes.” But he was wise enough not to elaborate on what type of taxes, because there is great uncertainty on that topic, especially as we await the outcome of the November elections.

Of course, no one knows what the future may hold. Will the Democrats take the White House and both houses of Congress? Or will the Senate be the one chamber that remains in Republican hands? Or will both major parties retain control over the offices and houses that they currently control?

Despite this uncertainty and any resulting effect on our tax laws, it is still worthwhile to review what the candidates from the major parties have proposed to see what impact, if any, there may be on taxes if a particular candidate or political party is successful.

For the most part, President Trump’s tax policies are reflected in the 2017 Tax Cuts and Jobs Act (TCJA). Other than a few mentions of some minor tweaks (like lowering and/or indexing the capital gains tax rate and extending the federal estate and gift tax exclusion), the Trump campaign has not put forth any substantive proposals that would dramatically affect the current tax code.

On the other hand, Vice President Biden has put forth proposals that, if they do become law, would make significant changes to current tax policies in the United States. His campaign has made it clear that a Biden Administration would increase taxes on wealthier taxpayers. While his proposals would potentially impact many sections of the tax code for businesses and individuals, the more significant ones of which investors should be aware are as follows:

Federal Estate and Gift Tax Exemption – The Biden campaign has proposed moving the federal estate and gift tax exemption back to its pre-2017 level of $3.5 million per person from the current $11.6 million per person. (NOTE: the current exemption amount will still revert to $5 million in 2025 if Congress does not act.) By lowering the exemption amount, more estates in the United States would be subject to the federal estate tax.

Step-Up In Basis – Under current law, when a person inherits an asset from an estate, the new owner is able to legally change or “step up” the cost basis of the asset to its market value as of the deceased person’s date of death, irrespective of what the deceased person paid for the asset. Thus, when the new owner sells the asset, he or she pays capital gains (if any are due) based on the difference between the “stepped-up” basis and the actual sales price. The Biden plan removes the “step up” provision of the current law, which may result in (1) the new owner having to still use the deceased owner’s cost basis when the asset is eventually sold or (2) a tax being due at the time of death on the unrealized gain embedded in the asset (based on the difference in the deceased person’s cost basis and the date of death value). The effect of this change would be an increase in capital gains due after the sale of assets because of the lower cost basis.

Income Taxes – The Biden proposal suggests increasing the top income tax rate to 39% from 37%. While the Biden plan does include reinstating some of the income tax deductions that were in place before 2017, it does put some limits on these deductions for households with income that exceeds $400,000.

Capital Gains Taxes – For those taxpayers with adjusted gross incomes above $1 million, the Biden plan would remove the favorable tax treatment for long-term capital gains (based on the sale of investments held for more than 12 months) and would tax capital gains and dividends at the same rate as ordinary income. This would effectively double the tax rate on long-term capital gains for these taxpayers.

If the Biden/Harris ticket is successful, their Administration may first focus on areas believed to be more critical than tax policy, such as stimulus or infrastructure spending. However, when it comes to revising the tax code, it is quite possible that any changes made any time in 2021 will be retroactively applied back to Jan. 1, 2021. (The U.S. Supreme Court has held that the retroactive application of a tax law is constitutional.) Thus, just because a law is in effect on a day that a taxpayer takes action (i.e. early in 2021 before any new tax legislation is passed), he or she is not guaranteed that the law governing the action will not be changed before the end of the tax year. Thus, if any action is required to take advantage of current (2020) tax laws, it would be prudent to have it completed before the ball drops at midnight on 12/31/2020.

While it may be premature to take final action before knowing the conclusive election results, there are still preliminary steps that would be sensible to take before Nov. 3:

1| Review your current financial assets (e.g. stocks, bonds, mutual funds, real estate, business holdings, etc.). Consider the income tax and capital gains implications that are tied or embedded in each one.

2| Review your current estate plan. Review your will or other testamentary documents. Consult now with your trusted advisors—such as your attorney, accountant or trust officer—to ensure you have a good understanding of your current strategy for distributing your assets at your death and how the proposed tax changes might affect your plan today if you take no action.

3| Evaluate possible actions to take if the election outcome favors the thesis that the White House and Congress will enact significant tax law changes in 2021 that will impact you directly. By making a tentative plan now and identifying possible solutions that you could implement under various scenarios, when the election results are confirmed, you will be in a better position to move forward quickly with implementing those measures required to best protect your income and/or estate from unnecessary taxes.

Now is a good time to go through the process above, especially in light of (1) the substantial changes being proposed by the Biden/Harris team and (2) the fact that many of the income tax and estate provisions will expire or change at the end of 2025 irrespective of the election outcome. If any of the tax legislation that has been proposed becomes the law, you will be glad that you took the time to thoughtfully consider its impact and take action as your advisors and you deem to be in your best interest. It is expected that after the election many of the professionals with whom you may need to meet could be extremely busy working with clients who are also in need of review and changes before year-end. As a result, it is advisable to meet with your advisors before the election rather than afterward, when time may be of the essence.

It’s true that anything can happen in politics, but having an idea on how to respond ahead of the possible outcomes is a prudent exercise to undertake.