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Estate Planning Post Election: Why Now?

12/16/20 – Lisa Riccardi

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Coming off of the heels of the recent election you may be wondering if you should revisit your estate plan. For example, Estates worth more than the current unified federal estate and gift tax exemption are exposed to the federal estate tax at rates as high as 40%. So, wealthy individuals may need to take steps to reduce their exposure.

However, a year-end estate tax self-check is prudent for everyone, even if you're not currently exposed to the federal estate tax. People with taxable estates below the current unified federal estate and gift tax exemption level may need to make changes to reflect the current tax regime. Plus, you should also consider whether changes are needed for nontax reasons.

Estate planning is especially important this year, because today's generous federal estate tax regime may not last. Presumptive President-Elect Joe Biden has indicated that he would like to unwind the generous federal estate and gift tax provisions of the Tax Cuts and Jobs Act (TJCA) to pay for various spending measures.

If Congress follows Biden's plan, the pre-TCJA exemptions would likely fall to an inflation-adjusted $5 million, or $10 million for married couples. That change could go into effect as soon as 2021 or 2022, but it's not likely to be retroactive to 2020. It's also possible that the exemptions could fall below the pre-TCJA levels.

Biden would also like to eliminate the basis step-up for inherited assets. Under current law, the federal income tax basis of an inherited capital-gain asset is stepped up fair market value as of the decedent's date of death. So, if heirs sell inherited capital-gain assets, they owe federal capital gains tax only on the post-death appreciation, if any.

This provision can be a huge tax-saver for an inherited asset that has appreciated significantly over the years — such as stock shares that were acquired many years ago for a small amount and are now worth millions. Biden plans to encourage Congress to eliminate this tax-saving provision.

Important: As of this writing, several state recounts and legal challenges are ongoing in the presidential race. And the presidential election won't be certified by the Electoral College until later December.

Also, remember that Congress enacts federal tax law changes. Control of the Senate will be determined by a pair of Georgia runoff elections in January. Regardless of the outcome of those runoffs, the likely political makeup of Congress will be split nearly 50/50 between Republicans and Democrats. So, the odds of major changes to the federal estate and gift tax regime are probably low for 2021 and 2022. After that, who knows?

Making large tax-free gifts is one way to recognize and potentially disarm this threat. Presumably, that will help insulate you against any later reduction in the unified federal estate and gift tax exemption. If you have any questions please contact Lisa Riccardi at lriccardi@vlcpa.com or 859-331-3300.