The 2020 presidential election has been called, naming Joe Biden and Kamala Harris as the president-elect and vice-president-elect, respectively. The Democratic duo won 306 electoral votes, a majority over Republican incumbents Donald Trump and Mike Pence’s 232 electoral votes. This Democratic victory comes alongside the Democrats retaining control of the House of Representatives and having a chance to win the Senate majority through the two Georgia seats up for runoff elections. What does this mean for your own estate plan and income tax?
According to an article from the American Academy of Estate Planning Attorneys titled “What the 2020 Election Could Mean for Your Estate Plan,” if the Democrats succeed in gaining control of the Senate in addition to their already achieved victories in the House and White House, it is likely that they will pass a tax bill aligned with Biden’s campaign talking points.
During his campaign for the presidency, Biden told constituents of a tax plan that included the reduction of the amount which could be passed free of any estate tax from the current $11.58 million to a markedly lower $3.5 million. His plan also calls for an increase in income tax rates and capital gains tax rates, among other changes.
While the Senate seats in Georgia will be up for runoff elections on January 5th, 2021, and Inauguration Day is not until January 20th, a Democratic tax bill could be made retroactive to January 1st. Such a bill will likely include the aforementioned reduction of the estate tax exclusion to $3.5 million.
For individuals with assets that amount to more than $3.5 million by the time of their death, they would effectively owe an estate tax worth 40% of any assets exceeding $3.5 million. Fortunately, these individuals may be able to take advantage of the current $11.58 million exemption. To do so, these people would need to act in 2020, since a Democratic-controlled government could make an estate tax bill retroactive to January 1st, as mentioned. (Please note: Even without Congressional action, under current United States law, the $11.58 million exclusion will be halved when 2025 comes to a close.)
Therefore, in 2020, to avoid being impacted by a Biden tax bill, these individuals could simply gift outright to their children and/or beneficiaries. But gifting to a trust may be a better option, as this can protect these assets from creditors, divorcing spouses, and the beneficiary’s own mismanagement. For a married person, the assets could be gifted to an irrevocable trust for their spouse’s benefit. When the time comes, trusts would then distribute for the benefit of all beneficiaries per the distribution terms you have specified; for instance, for their health, maintenance, support, and/or education.
As for avoiding higher income tax rates that would more likely than not accompany a Biden tax bill, the most viable option might be to recognize your income in 2020 via end-of-year planning or to defer deductions to 2021 when they could become more valuable.
There is a very possible chance that the Democrats could win the Georgia seats in the Senate, rendering Democrats in control of Congress and the presidency. Therefore, if you are going to be majorly affected by a Biden tax plan, it is advisable to consult an estate planning attorney to discuss all the legal options available to you.
About the Author: Attorney Randall “Randy” Holmgren
Pearson Butler Attorney Randall “Randy” Holmgren has helped more than a thousand clients with their estate plans, using asset-protection strategies to find them peace of mind regarding their end-of-life plans. He has been a member of the American Academy of Estate Planning Attorneys for 25 years, illustrating his deep involvement in the professional community of his chosen legal practice area. He has been honored by Utah Business Magazine in “Utah Legal Elite” and holds the highest peer-review “AV Rating” from Martindale-Hubbell.
To schedule an appointment with Attorney Holmgren, contact Pearson Butler online or call (800) 265-2314.