2020 Estate Tax Considerations
/Is now the right time to consider estate lifetime gifts? Yes, we believe proactive estate strategy management leads us to encourage individuals to pause and consider the following.
Wealth Management includes planning for tax expense risks which arise when one considers different policy paths over the coming years. There are always known laws and unknown possibilities. This summary is not meant to predict what may or may not happen following this election season; however, it is intended to raise awareness regarding planning opportunities which should be considered.
We firmly believe household strategy objectives supersede taxes, but that tax expense is a significant consideration in achieving one’s life and legacy goals. We do not suggest executing a change to one’s estate strategy simply based upon what may happen, we want to continue to bias decision making to what we know, the facts, and not how one may feel about the political landscape.
There are subjects which extend beyond the scope of this summary; including both individual U.S. State Death Taxes as well as an assessment of the U.S. deficit, debt, and budget planning with a normalization of interest rates on the expense to service the nation’s debt. The Clearwater Capital Team welcomes the opportunity to discuss these items as they are not addressed here.
In 2017 the current administration signed into law the Tax Cuts and Jobs Act. Thereunder, current law with respect to estate tax considerations are outlined in the following excerpt as sourced from the Internal Revenue Service (IRS), emphasis added:
The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. Once you have accounted for the Gross Estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your "Taxable Estate." After the net amount is computed, the value of lifetime taxable gifts (beginning with gifts made in 1977) is added to this number and the tax is computed.
Most relatively simple estates (cash, publicly traded securities, small amounts of other easily valued assets, and no special deductions or elections, or jointly held property) do not require the filing of an estate tax return. A filing is required for estates with combined gross assets and prior taxable gifts exceeding $5,490,000 in 2017.
Following the Tax Cuts and Jobs Act, exemption levels increased to $11,180,000 in 2018, $11,400,000 in 2019, and $11,580,000 in 2020. The aforementioned represent a single tax filer and given ‘portability’ at the Federal Level it results in an amount exempt of approximately $23 Million for a couple (spouses have unlimited exemption to the survivor). Above the respective amounts, wealth transferred incurs a 40% Federal Estate Tax.
Additionally, we know that the above law sunsets after December 31, 2025. Meaning no politician needs to vote to raise taxes at that time, the amount which an estate is taxed will automatically increase given the reduced exemption. (Note: upon sunsetting, the reduction in 2026 goes back to $5 Million indexed for inflation; therefore, some policy observers estimate a drop to between $6-7 Million exempt from federal estate tax for an individual).
The questions that come to mind with respect to estate taxes and strategy development introduces the utilization of lifetime taxable gifts. Said another way, you do not have to wait to die to begin using the lifetime exemption from estate taxes, you can move assets outside of your taxable estate during your lifetime.
The implications of giving during your lifetime are very significant and some of the benefits include:
allowing assets to continue to grow estate tax free outside of the taxable estate,
mitigate the risk of future reductions to estate tax exemptions, either through the change by policymakers or through the simple passage of time (this assumes changes to the law are not implemented retroactively),
if exemptions are ever increased, then the expectation would be that one is not worse off and only in a better position with respect to estate taxes.
Therefore, the following is not law nor is it a bill in Congress, but is simply the current understanding of Democratic Candidate Joe Biden’s proposals for taxes. According to The Tax Foundation there is an expectation of an effort to repeal the 2017 Tax Cuts and Jobs Act; the result being a reduction to the above noted exemptions.
Presidential Candidate Joe Biden partnered with Senator Bernie Sanders in the drafting of the Biden-Sanders Unity Task Force Recommendations on Combating the Climate Crisis and Pursuing Environmental Justice. In the 110-page document it states:
Page 15: “Estate taxes should also be raised back to the historical norm.”
Page 75: “Building a More Progressive Tax System: Use taxes as a tool to address extreme concentrations of income and wealth inequality. As a means of strengthening tax progressivity and paying for investments in U.S. productivity, increase taxes on the wealthiest Americans by limiting unequal and unproductive tax expenditures. In addition, limit the ability of wealthy taxpayers to defer and avoid taxes on income (especially that relate to financial investments), tax liabilities of ultra-large banks to promote financial stability and fund investments in American productivity, and expand payroll taxes on upper-income taxpayers to fund more generous Social Security benefits.”
In addition to the above, another estate planning consideration for all tax-payers would be a proposal which eliminates the step-up in basis at time of death as Ernst & Young captured in their ‘Post-2020 tax policy possibilities’ summary.
Either through a change in administration or the sunsetting of current law in a few years, an in-depth review of your estate structure, legacy objectives and lifetime gifting opportunities should be conducted in order to preserve assets for your family, beneficiaries, and charitable entities most important to you. There is a window of opportunity now and if this approach is appropriate for you, there most likely will be additional legal and tax work to be completed, so we encourage this discussion now – it is the right time.
John W. Sleeting
Senior Partner
