Estate Planning & Probate

With Election Day under five weeks away, the campaign season, though muted by the pandemic, is reaching a fevered pitch now that the debates have begun. General polling over the last few months has shown that Joseph R. Biden, Jr. has a significant chance to become President in 2021. Further, Republicans are defending more seats in the Senate during this election cycle in an attempt to protect a small majority in that chamber. If the past is our guide, the polling figures we see today can vary wildly between now and Election Day, so it is difficult to project the future political landscape in Washington as 2020 comes to a close.

That being said, if the Presidency and Senate change hands, it is likely tax legislation will not be far behind. As part of his plans, Mr. Biden could include lowering the federal gift and estate tax exemption from the current $11,580,000 per person level to between $3,500,000 and $5,000,000 per person. Further, Mr. Biden has proposed to remove the basis adjustment at death, meaning that beneficiaries would inherit assets with built-in capital gains, rather than with a “stepped up” basis to the date of death value. In addition, valuation discounts for closely held businesses and family limited partnerships will likely be on the chopping block.

With these potential changes in mind, if Mr. Biden wins the White House, we believe clients should seriously consider additional estate planning before the end of 2020. One option would be to transfer assets to an Irrevocable Trust or other recipient outside of the client’s estate, using some or all of the client’s current federal gift tax exemption. With the exemption limit being $11,580,000 per person in 2020, a couple has $23,160,000 of exemption in 2020. As an example, consider a change reducing the exemption to $4,000,000 per person, or $8,000,000 per couple. In this example, a couple transferring more than $8,000,000 of assets prior to any reduction would take advantage of the excess exemption. Because the exemption in this example would remain at $4,000,000 per person, gifts below this amount would not accomplish the goal of making use of the portion of the exemption that may disappear in 2021.

In addition to making large gifts in 2020, if the election results favor Mr. Biden, clients should consider transfers of closely held interests via gift or sale to Irrevocable Trusts. These transfers often involve valuation discounts for lack of marketability and lack of control. Discounts can assist with moving more assets out of a client’s taxable estate. Such discounts were on the path to being eliminated in late 2016 before the election that year, and it is reasonable to assume that they might be endangered again depending on the election results in November.

Regardless of these election-related concerns, low interest rates and reduced valuations due to the current economic climate have created opportunities with respect to estate tax planning techniques in 2020. These opportunities include sales of assets to Irrevocable Trusts, lending assets to family members and refinancing existing intra-family loans. As an example, in October, the minimum federal intra-family rate for a nine-year promissory note is only 0.38%. Such techniques can be very beneficial for clients who have taxable estates over the exempt amount, even if that amount stays the same in the future.

As with the elections in general, it is difficult to project which proposals will win out and how they will be changed through the legislative process. Many projected the estate tax exemption to be greatly reduced in 2008 with a similar “blue wave”, but President Obama and Mitch McConnell struck a deal in 2012 for a permanent federal estate tax exemption at $5,000,000, indexed for inflation (later changed to the current level by the Tax Cuts and Jobs Act in 2017). Even so, we felt it necessary to alert all of you to the possibility of changes coming down the road so that you may begin the process today of considering future actions prior to or after Election Day. Our estate planning attorneys would be pleased to speak with you about these considerations.