The upcoming presidential and congressional elections promise to bring about new tax legislation, including changes to estate and gift taxes. While a Democratic victory can be expected to affect more significant changes, neither candidate has issued yet a comprehensive, detailed plan.
President Trump’s second term agenda outlines his tax policy in broad strokes, but it lacks sufficient detail to properly evaluate or derive actionable recommendations at this time.
Still, it does include a few policy items, the common theme of which is tax relief to individuals and tax credits to businesses. The agenda calls for the expansion of existing tax breaks, new credits for certain industries and activities, and tax rate reductions.
Though none of these mention capital gains tax or gift and estate tax reductions by name, Trump recently expressed support for these in the context of middle-class tax cuts.
Despite the lack of specifics, in the case of a Trump victory, donors and their beneficiaries can reasonably expect to pay lower federal gift, estate, and capital gains taxes under a Trump/Republican plan.
The Biden campaign’s tax plan, while more detailed, is still short on specifics.
It calls for “equalizing the tax benefits of retirement plans….across the income scale.” It doesn’t elaborate further, but analysts report a possible 26% refundable tax credit for all taxpayers that may replace the current deduction for retirement plan contributions. This would be beneficial to taxpayers in lower tax brackets but will provide reduced tax savings for those in higher tax brackets.
Going by statements made in July 2019, Biden plans to offset the cost of his healthcare plan with several tax changes, including a significant increase to capital gains tax (profit made on assets that increased in value between purchase and sale).
Currently, the top tax rate on long-term capital gains (assets held for more than one year) is 20%. Under Biden’s proposal, the rate for capital gains over $1 million would be roughly 40%.
Additionally, Biden proposes to eliminate “step-up in basis” tax benefits, which allow beneficiaries of inherited assets (s.a. real estate, stocks, bonds, precious metals, and jewelry) to pay lower capital gains tax based on the appreciated value of the assets rather than their original purchase cost.
Moreover, Several bills introduced in the past two years by Democrats (Bernie Sanders’s Bill 309, Elizabeth Warren’s Bill 787, Cory Booker’s Bill 2231, Chris Van Hollen’s Bill 1950) have called for substantial changes to gift and estate taxes, and can be expected to manifest in one form or another in legislation passed by a blue congress.
Almost uniformly, these have proposed reducing the federal gift tax exemption to $1 Million from the current $11.58 Million; reducing the federal estate tax exemption to $3.5 Million from the current $11.58 Million; increasing the minimum term of Grantor Retained Annuity Trusts (GRATs, which minimize taxes on large financial gifts to family members) from 2 years to 10 years; subjecting all future Grantor Trusts to estate tax inclusion and gift tax on distributions; limiting per-donor annual exclusion gifts; and other restrictions and taxing.
YOUR ESTATE PLAN
Whatever the election results, changes to the tax code will affect your estate. Politics aside—from the narrow perspective of estate planning, a Trump/Republican victory will likely mean lower gift and estate taxes across the board, creating opportunity for greater saving and investment, while a Biden/Democratic victory will likely mean higher taxes on estate plans, creating the need to act quickly and plan to preserve your personal and family wealth.
Now is the time to create or review your estate plan and make sure you’re prepared for either eventuality come November.
There are a number of tools at your disposal, some more complex than others, but a short list includes:
- Irrevocable trust: a trust into which the grantor transfers all ownership of assets to the trust beneficiaries, legally relinquishing ownership rights.
- Pre-funded life insurance trust: for those with life insurance trusts that rely on annual exclusion gifts to fund the premiums, a large gift to the trust this year, while the gift tax exemption is high, can be used toward the premium in future years.
- Spousal limited access trust (SLAT): by establishing a trust that names the grantor’s spouse as beneficiary, the grantor can make completed gifts without completely giving up the household’s access to the trust.
- Dynasty trust: a long-term trust that allows for wealth to pass down generations without incurring transfer taxes (gift tax, estate tax, generation-skipping transfer tax (GSTT), etc.) as long as assets remain in the trust.
- Intrafamily loan: a grantor can lend money to a trust under a beneficiary’s name, effectively parlaying future appreciation to the next generation without paying estate tax.
- Taxable gift: making a large gift in trust or directly while the gift tax exemption remains high.
Morris Sabbagh is a partner in Vishnick McGovern Milizio’s Tax, Trusts & Estates, and Elder Law Practices. He focuses on assisting families with the preservation of wealth and administration of estates, as well as high-net-worth individuals to prevent the dissipation of assets to taxes. He can be reached at firstname.lastname@example.org and 516.437.4385 x120.
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