Update on Year-End Estate Planning

November 20, 2020

In our previous bulletin regarding year-end estate planning, we noted that if Joe Biden won the presidential election and the Democrats gained unified control of Congress, it was expected that significant changes may be made to the estate tax and the income tax. In the area of the estate tax, the primary concern was that the exemption from gift and estate tax and the generation-skipping transfer (GST) tax exemption – currently at $11,580,000 – may decrease under a Biden tax plan to as little as $3,500,000 (and potentially $1,000,000 with respect to the gift tax), and that the maximum estate, gift and GST tax rates may jump from 40% to 45%. Other campaign proposals included taxing unrealized capital gains at death and/or eliminating basis adjustment at death.

While it appears that Biden has won the presidential election and the Democrats have retained control of the House, Democratic control of the Senate hinges on two runoff races in Georgia that will take place on January 5, 2021.

We are not political prognosticators and cannot speak directly to the chances for the Democrats to win both races. However, even if the Democrats succeed in both races, the Senate will be tied 50-50, with Vice President Harris casting the deciding vote. In such circumstances, we believe that the likelihood of substantial tax reform – which would require a unified Democratic caucus in the face of strong Republican opposition – is unlikely to succeed. That said, it is possible that estate tax reform could pass as a standalone bill.

Accordingly, many clients who have begun planning for the use of their exemptions should consider completing their transactions by year-end. Those clients who are concerned the higher exemptions may disappear through estate tax reform that is retroactive to January 1, 2021 (an unlikely, but not impossible, prospect at this point in our opinion) should complete their transactions before year-end. We recommend to those clients who may be less concerned about the prospect of 2021 estate tax reform that they nevertheless consider exemption planning now. Many of our clients undertook similar planning efforts in 2012, the last time that there was a material risk that estate and gift tax exemptions might decrease, and the benefit of doing so was significant even though the exemptions in fact did not decrease. For those clients who funded irrevocable trusts in 2012, any growth in value that may have occurred since then will remain outside their estates, and all that growth will escape estate or other transfer tax at their death, and potentially the deaths of their children.

If you have not yet undertaken planning but wish to do so before year-end, please contact us as soon as possible.

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