Guest post by Elizabeth Lambert Cox, attorney, Scroggin & Company, P.C.
President Donald Trump and Democratic presidential-candidate, Vice President Joe Biden, have strikingly different perspectives on the tax law changes needed in the United States. Transfer taxes – estate taxes, gift taxes, and generation-skipping transfer taxes – are not immune to these opposing views. Given the differences in their approaches and the general volatility surrounding the 2020 election, you should review your current estate plan and be prepared to pivot, if necessary.
Current Federal Estate Tax Overview
The estate tax is a one-time tax imposed on the assets of a deceased individual. However, this exemption amount is reduced by the total of taxable gifts made by an individual throughout their lifetime. The Tax Cuts and Jobs Act of 2017 (TCJA) greatly shifted estate planning concerns and techniques for most Americans. The TCJA increased the estate tax exemption for each individual from approximately $5 million to $10 million (adjusted for inflation).
Currently, US taxpayers are generally subject to an estate tax of 40% of the value of all assets in their taxable estate exceeding $11.58 million at the date of their passing, depending on the amount of their previously made gifts. Additionally, assets included in an individual’s estate receive a step-up in its basis to the fair market value of the asset for the recipient. This means that highly appreciated assets could be sold by recipients soon after the death of the original owner with little to no recognized gain on the sale. This step-up in basis is available to all assets subject to the estate tax, even if no estate tax is paid.
However, the increased estate tax exemption under the TCJA will revert to $5 million (adjusted for inflation) after 2025.
The Republican Proposal
The Trump campaign has proposed making the estate tax changes in the TCJA permanent, maintaining the increased estate tax exemption amount and continuing to allow estate assets to receive a step-up in basis. By making these changes permanent, over 99% Americans would not be subject to any federal estate taxes upon their deaths.
The Democrat Proposal
The Biden campaign has proposed eliminating the basis step-up on inherited property. If the step-up is eliminated, then many heirs could be subject to increased capital gains upon the future sale or transfer of inherited property.
Note that the Biden campaign has not indicated any change to the estate tax exemption amount. However, individuals should pay attention since a potential decrease in the estate tax exemption amount could happen depending on the results of the 2020 congressional elections.
In preparation for the election, consider the following:
- Be prepared for last-minute estate planning changes. Obtain and keep records of your assets and all previously-drafted estate planning documents to make quick decisions for year-end estate tax planning.
- Maximize your current unused estate tax exemption by making tax-free gifts of assets before year-end. In addition to making gifts directly to individuals, gifts could also be made to trusts for the benefit of you, your spouse, children, or other family members.
- Consider using life insurance and life insurance trusts to remove assets from your estate. Properly drafted life insurance trusts should prevent the proceeds of a life insurance policy from being included in your estate at your death while continuing to provide support for your loved ones.
- Consider donating low-basis assets to non-profit entities – now or at the time of your death. This could create beneficial tax deductions while minimizing risks to your heirs.
I am happy to talk to you about your specific situation and how you can plan for potential changes to the federal estate tax. I can be reached by email (firstname.lastname@example.org) or phone (770-640-1101), and you can learn more about our firm at www.scrogginlaw.com.
Elizabeth Lambert Cox is an attorney with Scroggin & Company, P.C., located in Roswell, Georgia. She has an LL.M. in taxation from the University in Florida. Elizabeth works with families and business owners to create effective strategies during life and after death to preserve assets and best implement an individual’s wishes. Elizabeth assists clients with drafting of estate planning documents, implementation of trusts and other structures, and the preparation and filing of gift and estate tax returns.