The 2020 election has been fraught with uncertainty and anxiety for most voters. In addition to other differences that a potential blue wave could yield, our earlier client alert discussed possible changes to the estate, gift, and generation-skipping transfer (GST) tax laws, including (i) a reduction in the current $11,580,000 estate, gift, and GST tax exemptions; (ii) an increase in tax rates; (iii) the elimination of the step-up in basis at death; and (iv) limiting the use of grantor retained annuity trusts and valuation discounts for intrafamily transfers of closely held businesses. Furthermore, it was conceivable that these changes would be retroactively effective as of January 1, 2021.
Although the full election results may remain unsettled for some time, a somewhat clearer picture is starting to emerge. For the next two years, it appears that control of Congress is expected to remain divided, with Democrats in control of the House of Representatives and Republicans poised to remain in control of the Senate (though we won't know for certain until after the two Georgia Senate runoff elections on January 5).
What effect should this have on the estate plans of high-net-worth individuals? Should those taxpayers who were scrambling to use their remaining estate and gift tax exemptions by the end of 2020 now put the brakes on their gifting plan?
Although no one can predict the future, if the Republicans retain control of the Senate, the future of the estate and gift tax laws becomes even more uncertain than if the Democrats had won both the presidency and Congress. Although the goals of a Biden administration may remain the same, any significant reform of the estate and gift tax rules will require a bipartisan collaboration. Given the GOP's aversion to the estate tax, we do not foresee any major changes to the estate and gift tax in the next two years. Nevertheless, taxpayers who are in the process of making gifts this calendar year should not abandon their plans, for a number of reasons:
- Exemptions Are Scheduled to Decrease – Even if exemptions do not decrease under a Biden administration, the exemptions are still scheduled to decrease in 2026 under current law. Thus, clients will find themselves in a "use it or lose it" atmosphere, although we cannot be certain when. In addition, if a Biden administration prevails in changing the estate and gift tax rules (perhaps in 2023, depending on the 2022 midterm elections), the changes may be made retroactive. Clients that abandon their current gifting plans with the intention of restarting in the future may find themselves unprepared and unable to implement a timely strategy.
- Gifts Are Tax Efficient – Gifts offer a tax-efficient way to decrease one's eventual transfer tax liability. Not only do gifts prevent future appreciation from being subject to an eventual estate tax; the way in which gift taxes are calculated results in a lower tax liability than if those assets were instead subject to estate taxes. Moreover, many states that have an estate tax, like New York, Maryland, and the District of Columbia, do not impose a gift tax, allowing gifted assets to avoid state transfer taxes. As a result of the above, the sooner a gift is made, the more valuable the tax advantage. When making a gift, it is important to consult with your legal and tax advisors to understand the appropriate assets to gift and the recommended strategies that best fit your particular profile (regarding control and needs for current income and/or future liquidity).
- Review Title to Your Assets – For married couples, assets may be titled primarily in one spouse's name, or titled in both spouses' names as joint tenants with right of survivorship. For efficient use of each person's gift tax exemption, in non-community property states, title to assets should be reviewed for purposes of giving maximum flexibility for each spouse to use his or her separate exemption during life. While there is "portability" of the unused federal exemption between spouses at death, it doesn't apply to state exemptions and generation-skipping tax exemptions, and reliance on portability can lead to higher overall estate taxes under certain circumstances.
- Estate Planning Strategies May Be at Risk – Estate planners possess many tools in their toolbox. Depending on a client's unique circumstances, the nature of their assets, and their estate planning goals, different estate planning strategies will be appropriate for different clients. For instance, clients concerned about possible loss of cash flow may be able to preserve some benefit from gifted assets through a grantor retained annuity trust (GRAT) or an installment sale of discounted assets to a grantor trust. A Biden administration may seek to reduce the tax effectiveness of some of these strategies by changing applicable laws or imposing additional restrictions.
Given the benefits of gifting and the uncertainty of the evolving political atmosphere, individuals in the process of gifting this year should continue with their gifting plans. Furthermore, for those who have been contemplating gifts but have not yet begun to act, it is not too late, and you should contact your Venable wealth planning adviser as soon as possible to discuss the specifics of your situation.