Political election processes can be a mixed bag of emotions. Anxiety and apprehension are intermingled with both anticipation and excitement. Considering the already tumultuous global conditions, the 2020 election has produced even more turmoil than could have been expected. Below, we take a look at how this year’s election will impact estate planning.
Implications of the 2020 Election
Taxes are a typical point of contention for presidential debates and the subsequent election period. Throughout 2020, a number of new and unprecedented issues arose. While the pandemic and economic status were major headlines, proposed changes to estate planning laws quickly rose to the surface.
The potential fallout extends well into the estate and tax planning arena and has left individuals, couples, and businesses reevaluating their estate planning theories. Recent tax reform legislation known as the Tax Cuts and Jobs Act was enacted in 2017 but was anything but uniform. Revisiting this Act is one of many tax law changes that could be on the table.
Exemption Level Changes
One of two main effects on estate planning is the exemption level for married couples in relation to gifting. The current maximum exemption is $11,580,000 for an individual and just over $23,000,000 for married couples.
If proposed guidelines are accepted as proposed by the Democratic party, this generous exemption would significantly change. Under new tax guidelines, the tax exemption for married couples could be restricted to about $7,500,000. The remaining gap would be severely detrimental if not resolved in a timely manner.
The timing of these changes will essentially negate any previous attempts to extend favorable tax laws beyond the 2026 scheduled end. The Trump campaign hoped to enforce an extension for existing trust and estate planning guidelines. That no longer seems likely to materialize. Individuals who have already finalized their estate planning may be forced to revisit their financial plans according to new guidelines.
Increased Tax Liability
Another major tax consequence for individuals of high net worth is the proposed changes to gift tax rate guidelines. Current inheritance or gift tax rates for any assets over the exemption amount is a hefty 40 percent, but that would increase under the new proposal set forth by Democratic legislative committees.
Raising the gift tax rate presents an immense and unanticipated burden for the high net worth population. Individuals and families who have already performed the due diligence associated with estate planning are now taxed with revisiting their current strategy. The hard work of revisiting well laid plans creates undue emotional and mental stress, and may have to be rushed in cases of individuals with a terminal illness.
Other Proposed Challenges
To conclude these changes in an unparalleled approach to tax reform, the Biden administration has proposed an elimination of the base adjustments of asset appreciation for heirs. The current plan allows beneficiaries of an estate to bypass capital gains taxes by adjusting assets to market value upon death of the owner taxpayer. This break allows heirs to liquidate assets without realizing the subsequent capital gains tax. Under the new plan, there is no relief through basis adjustment, and capital gains tax would be due immediately with no recourse.
Although the effects of the 2020 election are prohibitive, there is relief in knowledge. Estate and trust planning experts like Appraisal Economics can help you plan or amend an existing plan to make the most of an unpleasant situation. Contact us today to get started.