Who will win the Presidential Election and control congress?  This is an important question for wealthy investors and taxpayers because it could have a major impact on their current and future tax bills.  Because tax policy is so politically charged, neither candidate is likely to accomplish much without his party’s full control of congress.  If Joe Biden becomes president and has a Democratic Congress behind him there could be extraordinary changes in tax policy.  Based on Biden’s proposals these changes could mean significantly higher taxes for wealthy taxpayers.  These taxpayers may want to contact their tax advisor and estate attorney now to discuss taking action.

The possibility for major changes to tax policy likely depends on the Democrats sweeping the White House and Congress.  If Trump is re-elected or the Democrats and Republicans split the White House and Congress more gridlock is likely.

• Raise the top marginal tax rate back to 39.6% from 37%

• Increase tax rates for long-term capital gains to ordinary income tax rates for those with incomes over $1mm

• Increase payroll taxes to 12.4% on incomes over $400,000.  Currently wages over $137,700 are exempt.  Mr. Biden would keep that cap but then start the tax again at wages over $400,000

• Repeal the 20% deduction for income from pass-through businesses

• Impose limits on itemized deductions

• Increase corporate tax rates to 28% from 21%

• Restrict tax-free exchanges of real estate to those with incomes below $400,000

• Introduce tax credits for lower and middle-income taxpayers including child care, buying a first home and more

• Tax unrealized gains at death as capital gains, removing the step-up in basis

• Lower the estate tax exemption from $11.58mm per person to $5.49mm per person.  Biden has not proposed increasing the 40% estate tax rate

These changes, if enacted, would significantly increase the amount of family assets subject to capital gains or estate taxes.  Families with appreciated assets such as stocks, businesses, and real estate would pay capital gain taxes on those assets when a family member died rather than receiving them with a step-up in basis and avoiding capital gains taxes.  Likewise families with more than $10mm in assets would have a larger portion of their estate subject to a 40% estate or gift tax.

• Take capital gains in 2020 by selling appreciated assets such as stocks or real estate 

• Pay income and business distributions in 2020

• Exercise restricted stock or stock options in 2020

• Sell your business in 2020

• Convert a traditional IRA to a Roth IRA

• Transfer assets to family members with lower marginal tax rates

• Perform like-kind real estate exchanges in 2020

• Consider investing in opportunity zones in 2020

• Donate highly appreciated stock to a donor-advised fund or charitable trust in 2020

• Accelerate charitable giving and itemized deductions into 2020

To mitigate the potential lower estate tax exemption and loss of the step-up of basis at death, families with more than $10mm in assets can consider making gifts to a spouse or child before the end of the year.  The current estate tax exemption amount of $11.59mm is a “use it or lose it” opportunity.  Families can make outright gifts or in trust and IRS rules prohibit any clawback.  

 Wealthy families can also take advantage of gifting strategies that benefit from low interest rates such as Grantor-Retained Annuity Trusts (GRATs) and Charitable Lead Annuity Trusts (CLATs).  Specific strategies to consider include:

• Make outright gifts to children or in trust before the end of the year

• Consider using a Spousal Limited Access Trust (SLAT) to make gifts to a spouse that can help lower the amount of assets subject to estate tax

• Consider gifting strategies that benefit from low interest rates such as GRATs or CLATs

• Utilize family limited partnerships to gift appreciated assets to children

 We encourage wealthy families to consult with their tax advisors and estate planning attorneys regarding their options as soon as possible.  If they wait until the election is over their advisors may be too busy to help them with the necessary calculations and preparing legal documents.  We recommend that families consider asking their Estate Planning attorneys to draft and finalize gifting documents for families to hold in reserve to see what happens with the election.  To avoid overacting we recommend that families only consider gifting options that the family would be making in the future.  Making gifts or transfer simply to avoid taxes can be a knee-jerk reaction and lead to poor choices.

 The presidential election of 2016 taught us that the results of elections can be unpredictable.  But taxpayers can take action now to prepare for whatever may occur.  If you or someone you love needs help with these issues please contact us at info@summithillwealth.com to set up a complimentary consultation.

Disclosure:

Summit Hill Wealth Management does not offer tax planning or legal services, but may provide references to accounting, tax services or legal providers. They may also work with your attorney or independent tax or legal advisor. 

 All written content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Please consult a qualified professional for assistance with any tax or legal issue to review the implications.

Sources

1. “Where Trump and Biden Stand on Tax Policy” 9/17/20, Wall Street Journal

2. Ibid

3. Ibid

4. “Biden’s Tax Proposals for Capital Gain, Like Kind Exchanges, Basis Stepup & The Estate Tax – Tough Times Ahead?” 8/17/20, JD Supra