Election 2020: Wealth Planning Considerations

With election season in full swing, politicians have set forth plans to contain COVID-19, address social inequities and mitigate further harm to the economy. Although economic recovery is top of mind, tax policy is also center stage.

A victory by President Trump will ensure that the Tax Cuts & Jobs Act of 2017 (“TCJA”) heightened estate and gift tax exemption will remain intact and sunset in 2025. In recent months, new details have also emerged about presumptive Democratic nominee Joe Biden’s proposed tax plan, leading to one of the most common questions we are currently receiving: What, if any, changes should I be making to prepare for potential tax law changes?

At the moment, the Biden tax plan proposal is just that – a proposal, and numerous stars would have to align for it to become law. Making progress on this plan would almost certainly rely on both a Biden presidential victory and a Democratic “sweep” of the House and Senate. And even in that scenario, the legislation would likely be subject to vigorous debate and revision and, potentially, an accommodative economic landscape. Additionally, tax legislation often takes significant time to enact. With a Republican-controlled Congress, for example, the TCJA was not signed into law until nearly a year after President Trump took office.

That said, as proposed Biden’s $4 trillion tax plan would significantly impact wealthy families in life and at death. First, households with taxable income of $400,000 or more would face higher taxes. Second, heirs would no longer benefit from a step-up in basis from assets transferred at death. Third, capital gains and dividends would be taxed at the same rate as ordinary income for taxpayers with incomes above $1 million. And last, corporations would face an increase in the top corporate income tax rate, from 21% to 28%, and a 15% minimum tax would be imposed on a company’s book income.

Given the great interest, below we discuss several of the plan’s most significant proposed changes and corresponding wealth planning considerations. It is worth noting that the techniques discussed can be valuable in a wide array of circumstances and environments – and that tax planning should be guided by your long-term goals, not political predictions. When it comes to estate planning, incorporating flexibility is key.

Potential increase of income taxes

In 2017, the TCJA lowered tax rates and expanded tax brackets. Many of these tax cuts are set to sunset on December 31, 2025. At that point, the American Taxpayer Relief Act of 2012 (“ATRA”) will be reinstated. The top marginal tax rate under the ATRA is 39.6%. This marginal tax rate could come sooner than 2026 if Biden is elected president.

Wealth Planning Considerations:

  • Convert to a Roth IRA

    Consider converting your Traditional IRA to a Roth IRA as a way to mitigate against higher taxes in the future. With a Roth IRA, you pay taxes up front, allowing assets to grow tax free. Paying taxes now, while rates are lower, effectively shields income from higher future tax rates.

  • Shift income into 2020 and expenses into 2021

    Where possible, shifting your income into 2020 and delaying expenses until 2021 may shield you from potentially higher tax rates in 2021 and beyond. Additionally, delaying expenses until 2021 will help lower your taxable income that is subject to potentially higher income tax rates.

Potential repeal of step-up basis regime

If Biden is elected president, his desired surtax on wealthy families may come in the form of repeal of step-up in basis, which adjusts the cost basis of property transferred at death to its fair market value. This essentially eliminates an heir’s capital gains tax liability on appreciation in the property’s value that occurred over the owner’s life. If repealed, death would be treated as a realization event for capital gains taxation.

Wealth Planning Considerations:

  • Sell highly appreciated assets

    Analyze the value of assets and consider selling those that have appreciated greatly over a long period of time. Doing so would mean paying a top tax rate of 20% now, opposed to running the risk of potentially paying the top marginal rate of 39.6% later.

  • Donate assets to charity

    Consider donating low-basis assets to charity during life. In this instance, you may be more inclined to give to charity, especially if you are over or near the threshold for the lifetime gift and estate tax exclusion amount.

Potential premature sunset of doubled lifetime gift and estate tax exclusion

The TCJA doubled the lifetime gift and estate tax exclusion amount from $5 million to $10 million, adjusted for inflation ($11.58 million for individuals and $23.16 million for a married U.S. couple in 2020). But only for a defined period of time. Like many provisions of the TCJA, this increase is scheduled to sunset on December 31, 2025, which may potentially come sooner if there is a new administration in the White House.

Wealth Planning Considerations:

  • Use the lifetime exclusion amount outright

    Currently, for 2020, individuals can give away up to $11.58 million and couples can give away up to $23.16 million over their lifetimes without incurring the 40% gift and estate tax. With a potential sunset on the exclusion amount looming, many will want to consider taking advantage of lifetime gifting strategies before changes are enacted.

  • Use the lifetime exclusion amount in trust

    Optimizing the lifetime exclusion amount via trust is another option to explore. There are many types of trust arrangements that can be used when gifting via trust. Gifts in trust may also provide an opportunity to choose a trustee to make investment and distribution decisions, limit creditor access to assets and gain tax planning flexibility.

Potential increase to corporate taxes

The TCJA lowered the corporate tax rate from 35% to 21%. Unlike many provisions in the TCJA, which are scheduled to sunset, most corporate tax provisions are permanent. However, Biden proposes to increase the top corporate income tax rate from 21% to 28%. Additionally, his tax proposal sets forth implementation of a 15% minimum tax on a company’s book income. These changes would have a profound impact on multinational corporations and privately owned corporations alike.

Wealth Planning Considerations:

  • Shift income into 2020 and expenses into 2021

    Business owners may consider if it’s feasible to shift income into 2020 and expenses into 2021. For instance, owners of private companies can stand to benefit from negotiating contracts with customers to front-load more earnings in 2020. Conversely, business owners could also benefit from shifting expenses into 2021 when possible as a preventative measure against higher taxes in 2021 and beyond.

  • Revisit your business entity structure

    The potential of rising corporate taxes signals a good time to revisit your business entity structure from a tax perspective. Deciding not to convert your business entity from a pass-through entity such as an LLC or partnership to a C corporation may be advisable as a way to guard against increased income tax exposure. Alternatively, revoking C corporation status may also be advisable, depending on your overall goals.

Certainly, much can and will happen between now and November. But being aware of the proposals in play can help you prepare for an array of political outcomes. Consider reaching out to your advisor to discuss these and other strategies in greater depth and optimize your plan for all political seasons.

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This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.

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