Heads you win, Tails the IRS loses ...
It is highly likely that if former Vice President Joe Biden is elected President, there will be significant federal income, gift, and estate tax changes. The big question on everyone’s mind is, “what do I do now, before December 31, 2020?”
It is important to note that the proposed tax law changes in the “Biden Plan” do not occur without congressional approval. Democratic control of the House and Senate will be necessary to obtain the votes required to pass new legislation. Any changes enacted by Congress can be made effective as of December 31, 2020, even if passed later in 2021.
“Will these changes be retroactive, or will there be a year or so?”
Most tax advisors anticipate that the changes may be retroactive (for example, if the legislation passes in mid-2021, it may be retroactive to January 1, 2021). It is important to sit down with your advisors and thoughtfully contemplate your alternatives.
For more information, search “The Biden Plan” on your search engine to read more about the conceptual plan.
Income Tax Changes
We can anticipate that ordinary income tax rates will go back up (on taxpayers earning more than $400,000), and capital gains tax rates may be adjusted to ordinary income tax rates or, at a minimum, increase.
What can you do? Discuss with your tax advisors accelerating income into 2020 from 2021. The traditional strategy is to defer tax and accelerate deductions. Ask your tax advisor about “bunching” as it pertains to deductions. We recommend that you consider taking substantial additional income in 2020. Due to the complexity of the situation, your accountant will need to run alternative scenarios to make this decision.
“Should I consider a Roth Conversion?”
If you were on the fence about converting your qualified plan (IRA or 401(k)) into a Roth and whether to pay income taxes now, then this would be an excellent time to reconsider this move.
Unfortunately, the SECURE Act eliminated the “Stretch IRA” for most Non-Spouse recipients. (Discuss this strategy with, with regard to your spouse, with your tax advisor ASAP)
Gift and Estate Tax Changes
For taxpayers with anticipated taxable estates (single taxpayers over $3.5 million and married taxpayers over $7 million), it is necessary and appropriate to consider utilizing your federal gift (and estate) tax exemption now, before the end of the year.
For example, if you are married with $10 million dollars, then under the current $11.58 million-dollar gift and estate tax exemption per taxpayer, you would not have a federal transfer tax on your death. If the exemption goes back down to $3.5 million, you would have a federal gift or estate tax on the excess over $7 million. 40 percent (or the proposed 45 percent) on $3 million dollars would result in an approximate tax of $1.2 million-dollar gift or estate tax. While it is less likely for the exemption to roll back to the $3.5 million-dollar level, it is anticipated that it will roll back to half of the current exemption.
This rollback is already written into the current Federal tax law to take place in December of 2025.
Loss of Step-up in Basis or Tax on Capital Gains at death
The current federal law now provides a new stepped-up tax basis in your non-qualified retirement assets.
For instance, if you bought Coca-Cola stock for $10 a share and today it is worth $100 a share upon your death, the capital gain is $90. Under the existing law, the new tax basis in the hands of the recipient beneficiary is $100. The gain disappears.
If the step-up in basis law is repealed, the basis in the hands of the beneficiary will stay at $10, which would likely result in capital gains tax to be paid by the recipient. An alternative suggested change is an immediate capital gains tax upon death, similar to Canada’s plan. (i.e., VAT (Value Added Tax))
If your anticipated Estate is NOT taxable with a $3.5 million-dollar Federal exemption, then take our estate planning self-audit and focus on the proposed income tax changes.
Design an Estate Tax Freeze
Suppose you have an anticipated estate that IS taxable, but you do not wish to gift extensively at this early stage. In that case, you should take our estate planning self-audit and focus on “freezing” your estate tax liability under the new proposed plan.
“Freezing” works by using one of the many estate planning strategies that provide you with the use of your assets during your lifetime while also shifting the future appreciation on these assets to your heirs. (i.e., intra-family loans, Grantor Retained Annuity Trusts, and Sales to a Defective Grantor Trust).
Design an Estate Tax Freeze and utilize all or part of your Gift Tax Exemption before December 31, 2020.
If you have a significant anticipated Estate and are willing and able to gift assets now, consider the freeze transactions referred to above combined with additional estate planning gifting strategies.
(i.e., Spousal Estate Reduction Trust, non-spousal Estate Reduction Trust, Gift to Intentionally Defective Grantor Trust, Charitable Remainder and Charitable Lead Trusts, and Qualified Personal Residence Trust)
Time is clearly of the essence…
Regardless of who assumes the position in The White House, audit your estate plan now and utilize your maximum exemption before the end of the year if and only if the proposed estate plan will NOT affect your standard of living.
If you are married, ask about a spousal trust that will effectively use your exemption now but afford your spouse the use of the money throughout his or her lifetime.
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The second-best time? Today.
We hope to see you soon,
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