LEVATUS Tax and Estate | Election 2020 Practical Planning for Estate Tax Swing Factors

While there are many crosscurrents this election season, knowing what to expect from an estate and tax perspective is one way to stay in control, regardless of the outcome.

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Practical Planning for Estate Tax Swing Factors

The presidential election is here. While there are many crosscurrents this election season, knowing what to expect from an estate and tax perspective is one way to stay in control, regardless of the outcome.

Lifetime Exemption

From an estate perspective, the lifetime exemption  is one of the most significant election swing factors and one of the biggest tax saving opportunities for wealthy individuals. The rule allows gift amounts under the lifetime exclusion cap to be given without incurring a transfer tax. The current lifetime estate exclusion amount is $11,580,000 per taxpayer, which equals $23,160,600 for a married couple. Estates that go over this amount are currently taxed at 40%. The outcome of the election could dramatically change estate tax treatment.

Potential Changes to Estate Tax Rules

If former Vice President and presidential candidate Joe Biden is elected, the following changes are on the table:

· Likely a lower estate lifetime exclusion amount

· Repeal of stepped up basis

· Tax rate on estates likely to go higher than the current 40% rate

While the Biden team has not proposed specific changes to the estate tax rate or to the exclusion amount, there has been reference to returning to historical norms. The exclusion amount prior to the Tax Cuts and Jobs Act was $5 million per individual. The amount of the exclusion in 2009 was $3.5 million.

Clients with estates in excess of these amount may want to consider utilizing the larger exclusion amount now available via Trust strategies. Those with estates below these amounts need to consider both current value and future growth of assets to make a determination whether the extra layer of complexity is necessary.

If President Trump is re-elected the following is likely

·         The current estate exemption amounts remain through 2025

·         After exemption sunset in 2025, $5,000,000 per person, or $10,000,000 for a married couple, indexed for inflation.

·         40% tax on estates through 2025

In the case of a Biden victory or with the 2025 sunset under Trump, taxpayers with over $3.5 – 5 million in assets may want to consider more lifetime gifts to take advantage of the current historically high exemption rate. This decision needs to also assess the impact estate planning trusts have on the degree of financial flexibility.  Freely enjoying life, executing on priorities and spending in areas that are fulfilling should be priority one.

Making a plan …

There is an alphabet soup of SLATs, GRATs and BDITs to think about from a tax and estate perspective once the life perspective question is answered. A seasoned estate attorney should be consulted. Below are a couple examples.

SLAT – Spousal Lifetime Exemption Trust – Irrevocable trust set up by a spouse (husband or wife) for the benefit of their spouse and other beneficiaries. The gift is generally funded by gift (utilizing lifetime exclusion).

BDIT – Beneficiary Defective Inheritor’s Trust – In addition to having an unattractive name, this type of trust is irrevocable and basically allows one to enjoy the benefits of a traditional trust without giving up control of property or having the assets included in their taxable estate.

There are many tools to use in order to effectively address estate planning goals. Seasoned professionals understand both the nuance of the strategies and how they balance with financial flexibility and our ability to find fulfillment and fully enjoy life. There are lots of swing factors in the cards this election season, defining a roadmap that makes sense in the context of your life can add a bit of clarity to a complex landscape.

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