November is finally here - which means the relentless political ads, phone calls and social media posts are (thank goodness) coming to an end. As we spend the next few weeks discussing and determining the future of our country for the next four years, it’s important to prepare for potential changes to come - specifically changes regarding your estate taxes.
A Reminder About the Tax Cuts & Job Acts (TCJA) of 2017
President Trump enacted the Tax Cuts & Job Acts (TCJA) in 2017. Among other things, this act greatly increased the amount of money a person or couple could pass down to children or charity free from estate taxes. Prior to the TCJA, this number was $5,490,000 for individuals or $11,980,000 for couples in 2017. Any amount gifted or passed on above this amount would be taxed at a rate of 40 percent. Since the passing of the TCJA, the exemption limit has increased to $11,580,000 per person or $23,160,000 for couples.1
This legislation is meant to remain in effect until January 1, 2026 when it would, presumably, revert back to pre-TCJA exemptions levels (adjusted for inflation). Unless a new president, backed by Congress, reverses these orders.
If Biden Wins...
Biden is cited as saying he’d repeal TCJA benefits for high-income filers - which, in all likelihood, would include the TCJA’s higher tax-exempt limit for estate inheritances and gifts.2 If this becomes the case, this would affect those who may be planning on passing along an estate inheritance greater than $5.49 million (this number is based off of 2017 pre-TCJA numbers, but would be adjusted for inflation).
If Trump Wins…
If Trump is elected for a second term, it’s likely that the benefits outlined in the TCJA of 2017 would be upheld until their original expiration date in 2026.
What Should You Do to Prepare For a Potential Estate Tax Change?
If Biden wins the election, we could see tax changes - including estate and gift tax exemptions - go into effect as early as January 2021. This may also be dependent on the Senate and House majority, of which Biden may need to pass such tax legislative changes.
If you are worried this 50 percent drop in the tax exemption limit may affect your future gifting, there are a few things you can do now to alleviate the potential tax consequences. If possible, you could make gifts to your children or charities and use as much of the exemption as you can in 2020 before any tax changes were to go into effect.
In some cases, gifting or selling portions of your estate to certain types of trusts can help to preserve your estate as you prepare to pass it on to children or grandchildren.
Common trust types could include:
- Grantor Retained Annuity Trusts (GRATs)
- Intentionally Defective Grantor Trusts (IDGTs)
- Charitable Lead Annuity Trusts (CLATs)
- Qualified Personal Residence Trusts (QPRTs)
The type of trust you choose to utilize would depend heavily on your unique circumstances, as discussed with your estate planning attorney and/or financial advisor.
Few elections years in history have matched the volatility and uncertainty of 2020. Whether we’ll continue on the next four years with the same Commander in Chief or experience a change in leadership remains to be seen. But once the election results are in, don’t hesitate to reach out to determine how your tax obligations may be affected, and what you can do now to prepare.
Beacon Hill Private Wealth is an independent, fee-only, fiduciary investment advisor providing evidence-based wealth planning solutions that simplify our clients' financial lives. Founder Tom Geoghegan, CFP® CPWA® MBA is also a member of the National Association of Personal Financial Advisors (NAPFA).
The Certified Private Wealth Advisor® (CPWA) certification administered by the Investments & Wealth Institute® is the standard for competence in the field of wealth management today. The advanced credential created specifically for wealth managers working with high-net-worth clients is focused on the life cycle of wealth—accumulation, preservation, and distribution. CPWA certified professionals are able to identify and analyze the unique challenges high-net-worth individuals face and understand how to develop specific strategies to minimize taxes, monetize and protect assets, maximize growth, and transfer wealth. The CPWA designation signifies that an individual has met initial and on-going experience, ethical, education, and examination requirements for the professional designation, which is centered on private wealth management topics and strategies. Fewer than 1% of financial advisors have achieved the CPWA certification.3
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