The Wealth & Wisdom Blog

“The only thing constant in life is change.”  Heraclitus, Greek philosopher.

Ahead of the upcoming November election, this month’s update provides a brief overview of those policy positions of Joe Biden and Donald Trump that impact estate planning decisions.  I am by no means attempting to endorse a candidate, to or to predict the outcome. I am predicting, however, that federal tax law changes will occur in the coming four to five years. As a result, clients will need to carefully consider how these federal tax law changes impact their estate planning.

Below is a brief overview of the current tax law, as it was revised by the Tax Cuts and Job Act (“TCJA”).  Since President Trump has campaigned on the promise of making the TCJA permanent, his policy is essentially continue the current law.  The second column summarizes what would happen if the TCJA is allowed to “sunset” by 2025, and rates revert back to pre-TCJA law.  The third column summarizes, in general terms, my understanding of Biden’s policy positions.

Implications of a Biden Presidency:

If Vice President Joe Biden wins the election, we are likely to see an increase in the highest marginal income tax rate, an increase in the federal estate tax rate, and a reduction in the federal estate and gift tax exemption amount.  One additional Biden policy proposal, if implemented, would likely result in significant changes to estate planning strategies.  Historically, when surviving family members receive an asset following death, the cost basis is “stepped up” to the current fair market value. In contrast, an asset that was gifted during the asset owner’s lifetime receives only a “carry over” basis.  This means that the surviving family members would have the same cost basis as the original asset owner (that is, the cost basis is “carried over”) to the new asset owner.  While the details are not clear, Biden has proposed treating assets received at death as having a “carryover basis,” thereby eliminating the cost-basis step-up benefit to families at death.

If Biden is elected and implements these tax law changes, more families should consider significant lifetime gifting strategies. Traditionally, the step-up in cost basis benefit to a family with highly-appreciated assets might offset any increased risk of estate tax exposure, such that the original asset owner would hold the asset through his or death.  If the cost basis step-up benefit is lost, all tax incentives would be aligned in favor of making lifetime gifts.  In making lifetime gifts, wealthy individuals would not only minimize state and federal estate tax implications, but also shift taxable income to the younger generation, who in many cases would be at a lower marginal income tax bracket.  Lifetime gifts would therefore minimize estate tax, income tax, and capital gains tax exposure.

Implications of a Trump Reelection:

If Trump wins the election, he would need to work with Congress to pass legislation in order to make the TJCA of 2017 permanent.  One could envision a compromise tax plan with Congress, a plan that would that would likely result in a lowered federal estate tax exemption and/or higher income tax rates and federal estate tax rates than under current law, as enacted by the TCJA of 2017.

Considerations Ahead of Any Tax Law Changes:

Ahead of any such changes, here are some important points of consideration with your clients:

• Credit Shelter Trust Planning for Married Clients. For married clients, make sure that both a husband and wife have implemented a credit shelter trust strategy, also referred to as a “Family Trust” strategy, which makes full use of both a husband and wife’s estate tax exemptions.  If the planning is not implemented properly, the family will have lost the opportunity to make full use of both estate tax exemptions.
• Lifetime Gifting. As I summarized in a previous monthly update, now would be a good time for clients to “lock in” the current federal estate tax exemption amount of approximately $11.58 million by making significant lifetime gifts.  These gifts could be take the form of direct gifts to children or grandchildren, to trusts for children or grandchildren, or to a type of irrevocable trust called a spousal lifetime access trust (“SLAT”).
• Consider Charitable Beneficiaries. Particularly at a time when so many nonprofits are seeing a decrease in charitable giving, now would be the appropriate time for wealthy clients to re-consider the allocation of assets as between family and charity at death.  While increasing the percentages of assets to charity would effectively reduce the share allocated for children or grandchildren, many of the adult children I work with following the death of these charitably-minded clients are honored to carry out these objectives, to the detriment of the U.S. Treasury.
• Keep Track of Cost Basis Information. Finally, particularly if Biden is elected, clients might consider the means by which they will retain records of their personal financial contributions to their assets, such as improvements to the family cabin.  If the “step up” in cost basis benefit is eliminated from the tax code, the cost basis information will become important to the next generation