At least results are finally in perhaps to the most divisive Presidential Election of our lifetimes - which for one, at least means the relentless political ads, phone calls, and social media posts have (thank goodness) have hopefully also come to an end. As we all spend the next few months and subsequent four years experiencing the outcome and future of our country, it's important to prepare for potential changes to come - specifically, changes regarding your estate taxes.
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 greatly increased the amount of money a person or couple could pass down to children or charity free from estate taxes. Prior to the TCJA, this number was $5,490,000 for individuals or $11,980,000 for couples in 2017. Any amount gifted or passed on above this amount would be taxed at a rate of 40 percent. Since the passing of the TCJA, the exemption limit has increased to $11,580,000 per person or $23,160,000 for couples.1
This legislation was meant to remain in effect until January 1, 2026 when it would, presumably, revert back to pre-TCJA exemptions levels (adjusted for inflation). But now a new president, if backed by Congress, could reverse these orders sooner.
The Biden Assumption...
Biden is cited as saying 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.2 If this becomes the case, this would affect those who may be planning on passing along an estate inheritance greater than $5.49 million (this number is based on 2017 pre-TCJA numbers, but would be adjusted for inflation).
The Trump Assumption…
If Trump were to be considered elected for a second term, it's likely that the benefits outlined in the TCJA of 2017 would be upheld until their original expiration date in 2026.
What Should You Do to Prepare For a Potential Estate Tax Change?
With a Biden win holding, we could see additional tax changes - including estate and gift tax exemptions - go into effect as early as January 2021. This may also be dependent on the still pending Senate and also House majority, of which Biden may need to pass such tax legislative changes.
If you are worried this 50 percent 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. Or maybe you aren't worried, but you still just want to make savvy moves to help be a good steward of your estate for your family. Either way, if possible, you could still make gifts to your children or charities and use as much of the exemption as you can in 2020 before any tax changes were to go into effect. If this is important to you, this means you should start thinking and learning about this today.
In some cases, gifting or selling portions of your estate to certain types of trusts can help to preserve your estate as you prepare to pass it on to children or grandchildren.
Common, but infrequently considered trust types could include:
- Grantor Retained Annuity Trusts (GRATs)
- Intentionally Defective Grantor Trusts (IDGTs)
- Charitable Lead Annuity Trusts (CLATs)
- Qualified Personal Residence Trusts (QPRTs)
Has your financial advisor explored these with you? The type of trust you choose to utilize would depend heavily on your unique circumstances, and should collaboratively be discussed with your estate planning attorney, tax advisor, and financial advisor, in our opinion.
Few, if any, elections years in history have matched the volatility and uncertainty of 2020, and not only due to the Presidential Election of course. Whether we'll see tax changes introduced in the next four months or within the next four years remains to be seen. Regardless, one thing is certain. We have more government debt today, nearing the $28 trillion mark, and likely more to come soon with another stimulus bill coming soon. This is why we, at #CaliforniaRetirementAdvisors (CRA), have been preparing and positioning our clients for years against this looming threat of higher taxes.
But wait, there's more. We left out why in particular it makes sense that with the high and rising government debt, we are focusing on the Estate and Gift Tax Rules as likely the first priority tax item to be changed. This may sound insensitive, so I'll apologize in advance, as it isn't intended to be. But it is true if you think about it and I want it to be memorable in the hopes it may motivate readers to begin protecting for higher estate and legacy taxes. Who are the easiest people to tax? Dead people! Why? Because they don't vote, they don't complain and they don't write letters to their congressman or congresswoman.
Three Things You Can Do Now For The Next Generation…
Here are three things you can begin researching now, to prepare for the possibility of higher estate taxes:
1 - Use the $15,000 annual exclusion gifts prior to the year-end. These gifts do not reduce the gift/estate exemption These annual exclusion gifts are always tax-free, even if the exemption is used up. Recall, it is $15,000 per person, so if you are married and have two children, each of you and your spouse can gift $15,000 to each of your two children for a total of $60,000!
2 - Make unlimited gifts for direct payments for tuition and medical expenses. This is so underutilized and often forgotten, but these gifts do not reduce the gift/estate exemption. Plus these gifts are always tax-free – even if the exemption is used up.
3 - You can also make up to $11,580,000 lifetime gift/estate exemption – in 2020. This can be extremely valuable for people with higher net worth because even if the tax law changes, anything completed in 2020 has NO Clawback if these exemptions are used now. Do you have property or properties you want to pass to your heirs currently worth say $8,000,000 that may in the future be worth even more, say $11,000,000? Today both valuations would currently pass federal estate tax-free. But if you are worried that the estate tax exemption in the future might be reduced to say $5,000,000, leaving a full $6,000,000 to be taxed at an unknown tax rate, your concern is valid as you can see from prior estate planning tax rates.
|History of Estate Taxes Recent Top Federal Estate Tax Rates:
|1977 – 1981 70%
|2010 - No estate tax (Sunset Provision)
|2011 – 2012 35%
|2013 – 2020 40%
|1984 – 2001 55%
|2021 40% …or ???
|2007 – 2009 45%
|Beyond – This could change soon!
Actions You Can Take To Stay Informed As The Rules Change…
First, if you aren't familiar with any of these options, don't feel bad. Many people aren't. Besides, remember, "education is learning what you didn't even know you didn't know". We believe the best thing you can do now is simply to begin taking an interest. Begin exploring what may benefit you and your family so you can make proactive moves rather than having reactive regret about something you didn't know about later. Here are a few things you can do to stay informed:
1. Meet with your tax advisor: This is a great time of year to meet with your tax advisor if you have one that helps you explore how to "reduce" taxes rather than just determining how much you own in taxes for the prior year. Otherwise, interview those that can help with tax reduction planning, not just tax preparation
2. Meet with your financial advisor or #CERTIFIEDFINANCIALPLANNER, if you have one to help review all of your considerations beyond merely the taxes, or the investments in terms of meeting your personal estate planning goals and other objectives. You can ask them to run a "What-If" scenario showing the impact of different potential outcomes given different variables.3. Follow the #Kiplinger Estate Planning page by clicking here: Kiplinger's
4. Subscribe to this blog or Follow our Facebook page as we'll be posting more on this topic.
5. Contact us at for a free 15 minute introduction call to help determine an appropriate course of action pertaining to your situation.
While we expect the tax rates to change at some point, there is no way to know exactly what will transpire or when. In any situation, however, we believe starting now to prepare proactively for possible changes simply makes good sense. This is, after all, what we are doing for our clients.
One final thought, remember that estate tax rate exemptions are much better today than they have historically.
"History does not repeat itself, but it rhymes." - Mark Twain (1835-1910)
Begin learning now, preparing proactively as possible. Once the next term officially begins, don't hesitate to reach out to your financial advisor again to determine how your tax obligations may be affected based upon any rule changes at that time. Your diligence is likely to provide greater benefit to your family legacy.
By Christian Cordoba
CERTIFIED FINANCIAL PLANNER™
& Founder of California Retirement Advisors
This content is developed from sources believed to be providing accurate information, and provided by #CaliforniaRetirementAdvisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment adviser. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076.