Year-End Estate Planning in an Election Year

Farella Braun + Martel LLP

Farella Braun + Martel LLP

The 2020 election is less than a month away and year-end estate planning is already underway for many. Under current law, the estate, gift and GST (generation-skipping transfer) tax exemptions for 2020 are set at $11,580,000 per individual, or $23,160,000 for married couples. Individuals may gift assets during life or at death up to his or her available exemption; gifts in excess of the available exemption amount are taxed at 40%. Due to the unprecedented budget deficit and COVID-19-related stimulus spending, many commentators expect tax reform in 2021, including changes to the estate, gift and GST tax exemptions.

In 2017, President Trump signed into law the Tax Cuts and Jobs Act (TCJA) which, among other things, doubled the estate, gift and GST tax exemptions. Absent further action by Congress, the current exemption amounts will be reduced after December 31, 2025, back to pre-TCJA levels of $5,000,000 (increased for inflation after 2011). President Trump has indicated that if he is re-elected he will seek to extend the TCJA provisions that are set to expire on December 31, 2025. Meanwhile, former Vice President Joe Biden has stated that if he is elected, he plans to repeal the TCJA. 

Hence, many commenters have suggested that under a Biden administration, the estate, gift and GST tax exemptions may be reduced to pre-TCJA levels (i.e., $5,000,000 per person) or lower, well before their current expiration date of December 31, 2025, and even as early as January 1, 2021 (through retroactive legislation). In addition to the decrease in the exemption amounts, Biden has released plans to eliminate the increase in basis for inherited assets. 

For people who would be adversely impacted by a reduction of the estate, gift and GST tax exemptions, there are various estate planning techniques that may allow them to make gifts under current law and fully utilize their exemption, before any potential reduction. 

For example, completed gifts or sales to irrevocable trusts, or completed gifts to family members may allow a person to use up his or her $11,580,000 estate, gift and GST exemption; if the exemption amount is later reduced, the individual will have transferred assets which otherwise would have been subject to tax at 40%, and any future appreciation will occur outside the donor’s estate. 

Given that two separate California ballot initiatives (Propositions 15 and 19) may change the current property tax rules in 2021, California real estate may be a good asset to gift before the end of 2020.

The best approach from the outset is to take care to refrain from making gifts that might jeopardize lifestyle, especially in light of the unusual circumstances we currently face. Tax savings is merely a part of a larger discussion to be had around wealth transfer strategies.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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