Election day is right around the corner, and the outcome may have a significant impact on the amount of assets you can pass to your heirs free of estate and gift taxes.
Currently, each person has a whopping $11.58 million exemption from federal estate and gift taxes. That came as a result of the Tax Cuts and Jobs Act (TCJA) signed into law by president Trump on December 22, 2017, where he effectively doubled the former estate tax exemption of $5 million. The IRS just announced on October 26 that the estate tax exemption for 2021 will be set at $11.7 million. The historically large exemption is scheduled to last until the end of 2025 and be adjusted annually for inflation, at which time it is scheduled to revert back to its pre-TCJA level of $5 million (adjusted for inflation).
Up until recently, it has been assumed that the exemption would remain in place as it's written until at least 2025, giving wealthier clients some time to decide if they wanted to make lifetime gifts before the end of 2025. In fact, a year ago the IRS confirmed that lifetime gifts made between 2018 and 2025 (during the high exemption period) would not be taxed later on when/if the exemption goes back down.
This upcoming election could potentially change all of that, however. According to this article dated October 26 in Forbes, Joe Biden has proposed restoring estate and gift taxes to their 2009 level: $3.5 million per person for the estate tax, and $1 million for the gift tax. That being said, this proposal does not guarantee it will become the law if Biden wins, because the matter of who controls the House and Senate will also factor into what will happen. Even then, tax legislation is a lengthy process that would not pass until later in 2021 or even 2022. However, there is concern that, if these new laws are passed, they will be retroactive to January 1, 2021.
This concern has the phones "ringing off the hook for estate planning attorneys and accountants", according to a CNBC article this week. People are eager to look into ways to gift away assets now in order to take advantage of the current gift and estate tax exemption out of fear that it may not remain where it is for long, possibly effectively ending as early as year end, and not the end of 2025 as the law currently provides for.
This doesn't mean you should start recklessly giving away assets without an overall plan of its long-term impact on you and your ability to maintain your standard of living or do anything you simply aren't comfortable with, however. According to the CNBC article referenced above:
Nobody knows how the election will ultimately play out, so there’s some hesitation to move millions of dollars with transactions that could be hard to undo.
The article also goes on to suggest, however, that it "doesn’t mean wealthy clients should just sit tight." Instead, now is the time to get together with your financial and tax advisors, prepare a balance sheet (a statement that details your assets and liabilities) and then draft projections of what you’ll need to maintain your standard of living. Once you determine what you will need to live on, at least consider gifting away some or all of the rest if you are concerned about those assets being taxed later on. Right now, individuals can give away up to $11.58 million free of any gift tax, and once those assets are gifted away they cannot be taxed later on. Married couples can give away up to $23.16 million.
If you determine that you have assets you can afford to part with now, while the exemption is still high, be prepared to move quickly. According to CNBC, the professionals you need will be in high demand after the election. I can attest to this personally simply in terms of general estate planning demand, which has been through the roof since COVID (I'm personally booked through year end and into 2021 already). When you then factor in the specialized expertise that is required to properly implement advanced estate and gift tax strategies, and the potential need for appraisals or the drafting of irrevocable trusts, the pool of available professionals starts to look pretty small in comparison to the demand. According to the CEO of one major real estate appraisal firm, for instance, tax related workflow is triple the norm.
If this article resonates with you, and you have determined after consulting with your financial and tax advisors that you have assets, businesses or other interests that you want to seriously look into giving away in whole or in part now in an attempt to get ahead of these potential changes in the law, feel free and contact me and I will do my best to help you to find the support you need. Even though I am thoroughly booked through year end personally, I may be able to find support within my network. Alternatively, be proactive and schedule an appointment now with experienced counsel with an emphasis in advanced estate tax planning either through your own research, or by contacting attorneys who have been certified by the California State Bar as specialists in taxation or estate planning and tell them that you wish to consult about implementing a gifting program. Again, and I can't emphasize this enough, if this is something you are serious about, the impact of waiting very long to make an appointment could be the difference between being able to take action, and not. I'm not one to advocate panic planning by any means, but these are just the times we are in at the moment and it's important to be realistic - because the window may be in fact be quite short.