Like many other things this year, uncertainty reigns supreme for tax planning as we approach the end of 2020. Barring successful litigation by President Trump’s legal team, the Biden-Harris Administration will assume control of the executive branch of the Federal Government in early 2021. With that said, the focus for tax planning is control of the United States Senate. The GOP will control at least 50 of the 100 seats in the United States Senate. A Democratic sweep in Georgia’s special election on January 5 would evenly divide the Senate and allow presumptive Vice President Harris to break ties.
The filibuster, however, would still exist to slow action on legislation. Even if the GOP retains a narrow majority in the United States Senate, presumptive President Biden was a deal-maker as a United States Senator. It remains to be seen if Senator McConnell and moderate GOP Senators would acquiesce to tax proposals from the Biden-Harris Administration, especially if the tax changes are coupled with other legislation supported by the GOP.
With all this uncertainty in the tax planning arena, we offer a few planning points for your consideration:
Estate and Gift Tax:
- Any changes to the federal estate and gift tax regime will not occur in this calendar year. Individuals may transfer up to $11.58M and married couples can transfer more than $23M without paying federal estate and gift tax liability. These figures are unusually large. Without Congressional action, these limits will be nearly halved at the end of 2025 when the current law “sunsets.” In round numbers, the differential to a married couple with a $23M balance sheet is a $4.4M bill from the Internal Revenue Service. The cost of inaction may be even more significant if the federal estate and gift tax law is changed prior to its scheduled expiration.
- For individuals who face estate tax liability at current levels, the recommended mitigation strategy is current gifts. The future appreciation of transferred assets should not generate additional estate tax liability at death. It is possible with various advanced estate tax planning techniques to retain cash flow relative to transferred assets (at least for a period of time). The choice is a bit more difficult for individuals who do not have estate tax liability under current law but have a projected liability after January 1, 2026. Often implementing an estate tax “freeze” strategy has sizable benefits for these individuals. Further, low-interest rates also make many of the estate tax planning strategies even more effective when implemented over a longer time horizon.
- Gifts before the end of the year have the most certainty. After January 1, 2021, the relative risk increases because of the possibility of Congressional action to reduce the amounts that can be transferred free from federal estate and gift tax. We put the odds of a change in the law at less than 50%, but this forecast depends upon a number of evolving assumptions, control of the United States Senate, and the possibility of horse-trading relative to policy considerations beyond federal estate and gift tax. On the other hand, it seems reasonably unlikely Congress will extend the current law beyond January 1, 2026. In other words, the best odds are a continuation of the current federal gift and estate tax law until the end of 2025 and a reduction in levels thereafter. Alternative outcomes, however, are certainly within the realm of possibilities.
- The Internal Revenue Service has previously published guidance indicating “clawback liability” following a future reduction in estate and gift tax levels will not occur. Given this guidance and the practical difficulty in any “clawback” liability calculation, the tax downsides to large, current gifts can be managed. In other words, a current gift is unlikely to generate additional liability at death simply because the law changed between the time of the gift and the death of the donor.
Estate tax liability can drive planning efforts and we hope our thinking is helpful on that front. Further, there are also non-tax reasons for revisiting your succession planning efforts, especially with all that is occurring in the world today. We stand ready to assist.