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Estate Tax Planning Top of Mind Going into Election Day

By Robert Evans
Senior Manager at Blue and Co. LLC

With just hours until election results begin pouring in, many estates are contemplating what a blue wave might mean for the future of income and estate tax planning.

From an estate tax planning perspective, we have been very fortunate lately in that individuals with estates of less than $11.58 million ($23.16 for married taxpayers) could pass their estates to the next generation estate tax free.

However, the tax plan announced by former Vice President Joe Biden, if enacted, is likely to have a major impact on how affluent families manage their wealth. This is because the Biden tax plan increases the estate tax as well as income taxes on high-income individuals and corporations.

Traditionally, estate and gift tax and income tax rules have created an interplay where a person’s health and wealth and the tax laws are used to create an optimal estate plan that maximizes tax benefits while minimizing tax costs. The current high estate tax credit, low income tax rates and prospects for a step-up in tax basis at death has caused many to stop planning altogether because of the relatively large estate that is tax-free $11.58 million ($23.16 million for a married couple).

The Biden tax plan would be a game-changer for many affluent taxpayers – among other things, it would cut the estate and gift tax exemption to 2009 levels – $3.5 million ($7 million for married taxpayers), increase the estate tax rate from 40% to 45%, and also eliminate the step-up in tax basis at death. It also seeks to raise the maximum individual tax rate from 37% to 39.6%, eliminate the 20% deduction under Section 199A for incomes above $400,000, add a 12.4% Social Security tax on earned income above $400,000, and increase the corporation tax rate from 21% to 28%.

In other words, as mentioned earlier, welcome back to the good old days of income and estate tax planning.

The higher tax rates and loss of the step-up in basis at death will encourage the creation of family limited partnerships (FLPs) and the gifting of minority interests in FLPs and closely held businesses to maximize the benefit of the lower estate and gift tax exemption. The changes may also encourage income-splitting among family members and other techniques to minimize income taxes.

The timing of actions to counteract the effects of the Biden tax bill may be important.

While Congress can make law changes effective at any time, it often makes tax increases effective as of the date legislation is introduced and not when the final law is signed or some other date. This earlier date is used to prevent taxpayers from stuffing transactions into the period between introduction and approval.

At the same time, it is unusual for Congress to retroactively tax transactions that have already occurred. So, this may be a last chance for taxpayers with a net worth between $3.5 million and $11.58 million ($7 million and $23.16 million for married taxpayers) to make gifts to the younger generations tax-free before the opportunity closes. And even for smaller estates under $3.5 million, it may be a good time to make gifts at a lower value to preserve estate tax exclusion for other assets.

There are a few other reasons for affluent individuals to act quickly to update their estate plans sooner rather than later. The uncertainty surrounding the economic recovery from the COVID-19 crisis has often led to lower than normal business valuations, which lowers the value of gifts and preserves the exclusion for other assets. Secondly, the Biden proposals may make estate planning attorneys, business valuators and others involved in the estate planning process very popular people who are difficult to schedule time with.

Please do not hesitate to reach out to your Blue & Co., LLC advisor to discuss how the above potential changes could impact you.

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