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Wealthy individuals and families are breathing a sigh of relief in light of the election results. Their worst tax fears are not to be realized in the near term as the combination of a Democratic president and a likely Republican Senate means that significant tax legislation is off the table.
“Prior to the election there was a real concern that there would be a total blue wave and the lifetime exemption amounts would be reduced from the current amount to a much lesser amount in 2021,” says Michael Gordon, Managing Partner of the National Estate Planning Group at Gordon, Fournaris & Mammarella in Wilmington, Delaware.
For the past three years, the wealthy have been enjoying an increase in the amount they can pass along tax free at their deaths due to the Tax Cuts and Jobs Act of 2017 (TCJA) increasing the unified credit. With indexing for inflation, the exemption is scheduled to be $11,700,000 per person and $23,400,000 per married couple in 2021. The possibility that this could be rolled back motivated many to act on their estate planning.
“Many clients were concerned that the change would be retroactive to January 1, 2021,” explains Gordon.
Now that the 2020 election has been decided, wealthy families who did not act, now might want to consider their options.
Planning Overdrive
To some degree, a significant estate tax change occurring with a blue wave might have been overhyped.
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“I don’t think anyone in the estate planning world really thought that was a possibility,” says Gordon. “It has never happened before.”
Regardless of this, pre-election estate planning went into overdrive. The most strategic move was to fully fund a trust with the amount of the unified credit today. Thus, if the unified credit was rolled back to the Obama era rates, these families would be grandfathered under the higher amount.
Many families took it a step further and took advantage of the fact that certain states have been beneficial for descendants. States like Delaware and Nevada do not have a rule against perpetuities. This means that in most states, a trust set up for the benefit of descendants will ultimately have to terminate and the assets be distributed. But in a state like Delaware and Nevada, there are no limitations on the life of a trust; assets can continue to pass in trust forever.
Gordon confirms that this approach was appealing to wealthy families. “Pretty much all of my clients are moving forward with their gifting into the Delaware trusts this year,” he says. “I have convinced some to take a breath and be more methodical about the planning as even in a worst-case scenario we will have next year to do the planning.”
What Happens Next
But the real question is whether the wealthy need to take action today now that we know who will be in the White House for the next four years. After all, under the increased exemption, The Tax Policy Center found that in 2020, only 1,900 or less than 0.1 percent of all estates would be taxable.
“If the Republicans hold the Senate, I think it is highly unlikely we will see any change to the transfer tax system next year,” says Gordon. “It is always possible there is a negotiated tax bill and the Republicans cave on the estate tax, but I don’t see that happening.”
This is not to say that wealthy families are going to benefit for a larger exemption going forward without restriction. After all, the current law is set to sunset on December 31, 2025. The question remains whether something will change in the meantime.
“I do think we will see a change in the lifetime exemption amount over the next six years,” says Gordon. “I just don’t know if it will happen in 2022, 2024 or when it is scheduled to happen on January 1, 2026.”
The likely lack of a blue wave has simply punted the issue to a later time. But this does not mean the wealthy should do nothing at this time.
Gordon is more explicit. “Any client with an estate in excess of $20 Million really should think about moving assets out of their estate over the next few years,” he says.
But in terms of timing, it might not be such a rush.
“I think we will be in the exact same position two years from now, waiting to see what happens with the mid-term elections,” says Gordon.
Have A Plan
Ultimately wealthy families should be meeting with their estate attorneys to think through these complex decisions. The opportunity to transfer these high levels of wealth is still available – and will likely be so for the near term.