Current planning environment. While 2020 has been challenging in many ways, it has also provided favorable conditions for tax and wealth transfer planning. The U.S. is experiencing historically low interest rates, some assets have low valuations
due to economic volatility, and current tax laws are favorable for wealth transfer planning transactions. These factors combine to allow individuals to transfer assets out of their taxable estates at a reduced transfer tax cost.
In particular, current law allows for a historically high level of tax-free gifting. Under current law, each taxpayer may gift a certain amount of assets to others during lifetime or at death, tax-free (referred to as the “exemption amount”). Prior to January 2018, each taxpayer’s exemption amount was $5 million, indexed for inflation from 2011. The 2017 Tax Act doubled each taxpayer’s exemption amount. As a result, in 2020, each taxpayer may gift $11.58 million of assets during lifetime or at death, tax-free ($23.16 million for a married couple).
Potential changes. All of these favorable factors may change in the near future. Specifically, the provision of the 2017 Tax Act that increased the exemption amount is set to expire on December 31, 2025, unless Congress extends it. At that time, the
exemption amount will revert to roughly half of its current amount.
Many political observers believe that the exemption amount will be decreased significantly earlier than December 31, 2025, if the Democratic Party wins a majority of the Senate and Joe Biden wins the Presidency in November. Biden has stated publicly
that he would unwind the 2017 Tax Act, which doubled the exemption from $5 million to $10 million, indexed for inflation from 2011. He has also proposed taxing unrealized appreciation of assets passed on at death by eliminating the “step-up in basis” at a taxpayer’s death. Such legislation could be effective as early as January 1, 2021.
What this means for you. Many families who have delayed estate tax planning or who would not be subject to estate tax under the current exemption amount should consider undertaking lifetime tax planning before the end of 2020. In order to make sure that such planning is completed before the end of the year, we encourage our clients to begin the planning process now, for the following reasons:
- For optimal results, lifetime tax planning should be done in stages over a period of months, if not years.
- Due to COVID-19 and an increased volume of tax planning transactions this year, it may be difficult to create trusts and LLCs, open bank accounts, obtain tax identification numbers, and transfer assets in late 2020.
- We do not recommend rushing to make significant gifts at the end of the year. Even if you are not ready to complete gifts now, there are steps that you can take now to facilitate gifts at year-end and avoid end-of-year administrative roadblocks.
Given the current uncertain state of the economy and the political climate, we believe it is especially important to undertake tax planning that maintains flexibility and ensures your financial security. We have a number of tools available to take advantage of current favorable planning conditions while maintaining your access to your assets.