Why The Ultra Wealthy Are Anxious About The Georgia Runoff Election

As Yogi Berra would say, “It like déjà vu all over again”. At least that is what many ultra-high net worth individuals and families are feeling as election day looms in Georgia. Two months before in the lead up to the presidential election, many were feeling that the election outcome would have a big impact on their pocketbook. The runoff election in Georgia has brought that feeling back.

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“Given that control of the Senate hangs in the balance, there are a number of reasons for high-net worth individuals to have concern about the outcome, explains Glenn Christofides, a New York based Tax and Estate Attorney. “Many of those concerns are related to what tax legislation will look like – at least through the next mid-term elections.”

In particular, the ultra-wealthy are extremely focused on potential impact on the estate tax.  For the past few years, the estate tax law was working in their favor as the Tax Cuts and Jobs Act of 2017 (TCJA) doubled the unified tax credit. This is significant as this credit is the amount that can pass free of estate tax at one’s death. 

Prior to the TCJA, the unified credit was $5,490,000 in 2017 per person. The TCJA increased this amount to $11,180,000 per person. This amount continues to be subject to inflation on an annual basis. For 2021, it is $11,700,000 per person or $23,400,000 per married couple.

A Lot At Stake

But the Georgia runoff election has put this all at stake for the ultra-wealthy.

“If the Democrats win both Senate seats in Georgia, they will have control of the Senate. This makes it much more likely that a tax bill will be enacted at some point in 2021 that has a significant impact on ultra-high net worth individuals,” explains Michael Gordon, Managing Partner of the National Estate Planning Group at Gordon, Fournaris & Mammarella in Wilmington, Delaware.

There is are a number of changes that could adversely affect the ultra-wealthy.

“The transfer tax system could also change in several ways,” says Gordon. “Lifetime exemptions could be reduced, transfer tax rates could be increased and we could also see an elimination of the step-up in basis at death.”

For the ultra-wealthy, who are defined as having an asset base in excess of $30 million, it could be a painful change. Hence the anxiety regarding the election.

Hot Political Issue

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This anxiety might be well-founded. 

“The estate tax was never a massive revenue generator for the federal [government] fiscally,” says Christofides.

The Tax Policy Center projects that there is likely 1,900 taxable estates for individuals who died in 2020. These estate liabilities are estimated to generate $16 billion in tax revenue. While that seems like a large number, it is a drop in the bucket for the federal government.

But that does not mean it is not a hot political issue for both sides of the aisle, especially the Democrats.

“Extreme left Democrats are committed to increasing taxes and there is little love for any estate tax cuts by the Democrats,” explains Christofides. “It is very possible that something would be done to increase estate taxes.”

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As a result, a Democratic Congress could move forward with making changes to the estate tax and not impact many of their constituents while gaining political currency. Further the changes they would make might just be a return to the Obama era.

“It is very likely that the lifetime exemption amount could be reduced to $5 Million or less per taxpayer and transfer tax rates could be increased from the current 40% to 45% or higher,” explains Gordon.

What To Do

The ultra-wealthy will likely breathe a sigh of relief if the Republicans win in Georgia

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“The current transfer tax system will most likely stay in place,” says Gordon. “I don’t expect any tax bill to go through if the Republicans retain control of the Senate.”

Christofides agrees. “There will be much bigger and more important arguments to wrestle with House Democrats about.”

But that relief will be short-lived. Keep in mind that even if the Republicans win the Georgia runoff, it does not mean the current estate tax system stays in place forever. It is just simply kicking the can down the road since the TCJA will expire on December 31, 2025 and return to the Obama era rules.

As a result, the ultra-wealthy still need to focus on how to plan around this issue.

“Ultra-high net worth individuals will still have a window of opportunity to tax advantage of the current transfer tax laws to move significant wealth out of their estates,” explains Gordon.

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But for now, they are waiting to see if action should be taken in 2021 or a little further down the road.