Joseph R. Biden, Jr. will unseat current President Donald J. Trump this month, making him the 46th President of the United States. With a record-breaking voter turnout and a stressful week awaiting election results, most Americans are now turning their focus to what changes new leadership may bring. One area to review in light of Biden's victory is your estate plan, specifically estate tax changes that could affect your family.
A Reminder About the Tax Cuts & Job Acts (TCJA) of 2017
President Trump enacted the Tax Cuts & Job Acts (TCJA) in 2017. Among other things, this act increased the amount of money a person or couple could pass down to children or charity free from estate taxes. Before the TCJA, this number was $5,490,000 for individuals or $11,980,000 for couples. Any amount gifted or passed on above this amount would be taxed at a rate of 40%. Since the passing of the TCJA, the exemption limit has increased to $11,580,000 per person or $23,160,000 for couples.
The legislation is meant to remain in effect until January 1, 2026, when it would, presumably, revert to pre-TCJA exemptions levels (adjusted for inflation).
What Does Biden's Win Mean for High-Income Filers?
Biden has said that he’d repeal TCJA benefits for high-income filers, which, in all likelihood, would include the TCJA’s higher tax-exempt limit for estate inheritances and gifts. If this becomes the case, it would affect those who may be planning on passing along an estate inheritance greater than $5.49 million (based on pre-2017 TCJA numbers, before inflation adjustment).
What Should You Do to Prepare for a Potential Estate Tax Change?
With Biden winning the election, we could see tax changes - including changes to estate and gift tax exemptions - go into effect as early as this month. Of course, this may also depend on the Senate and House majority, who Biden may need to pass such tax legislative changes.
If you are worried this 50 % drop in the tax exemption limit may affect your future gifting, there are a few things you can do now to alleviate the potential tax consequences.
In some cases, gifting or selling portions of your estate to certain types of trusts can help preserve your estate as you prepare to pass it on to children or grandchildren.
Common trust types could include:
- Grantor Retained Annuity Trusts (GRATs)
- Intentionally Defective Grantor Trusts (IDGTs)
- Charitable Lead Annuity Trusts (CLATs)
- Qualified Personal Residence Trusts (QPRTs)
The type of trust you choose to utilize would depend heavily on your unique circumstances and should be discussed with your estate planning attorney and financial advisor.Few election years in history have matched the volatility and uncertainty of 2020. Don’t hesitate to reach out to your financial advisor to determine how your tax obligations may be affected and what you can do now to prepare.
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