How a Biden Presidency Could Complicate Your Estate Plan
As former Vice President Joe Biden looks likely to win the 2020 presidential election, it is important to consider how the democratic nominee tax policies will affect estate planning. Biden has already stated that he will attempt to change the gift and estate tax as well as the taxation of capital gains.
People will likely have time to make changes to their estate plan before Biden is inaugurated. However, it is advisable for people to work with their financial advisors or estate planning attorneys to create a plan and then execute the plan at a later date if necessary. This course of action will allow people to understand the potential changes that could occur and what their options are if these changes are implemented.
However, your plan of action will largely depend on individual factors such as your income, how much money you spend each year, the composition of your assets, and your gifting objectives. Below are a few important estate planning considerations and ways to mitigate extra taxation concerning these changes.
Gift and Estate Tax Considerations
In 2020, the gift and estate tax exemption are $11.58 million for an individual and $23.16 million for married couples. The 2017 Tax Cuts and Jobs Act doubled the lifetime gift tax exemption from previous levels. These exemption levels are set to automatically expire at the end of 2025. When this occurs, the estate and gift tax exemption will lower back down to $5 million for an individual.
However, if Biden holds his electoral college lead and secures the White House, these gift and estate tax exemptions will likely lower back down to at least $5 million for an individual sooner than 2025. This is particularly likely if the Democrats also take control of the Senate. Additionally, many are concerned about the effects of Biden’s proposal to increase the capital gains tax rate for individuals earning over $1 million to 39.6 percent. Further, Biden is proposing to eliminate the step-up in basis provision in the tax code. This provision allows beneficiaries who sell their inherited assets quickly to largely avoid capital gains taxes.
To avoid this increased tax rate, many people are gifting large amounts of money this year. However, some people are not comfortable gifting away millions of dollars at one time to their family and friends. For some people, gifting away a large percentage of their worth is not practical and may affect their lifestyle. However, some people may simply not feel comfortable seeing their lives savings cut in half. No matter if you want to increase your gifting this year to avoid higher taxation or want to hold onto your assets, it is vital to consult an estate planning attorney to create a plan anticipating these new laws.
Capital Gains Tax Considerations
In addition to gift and estate taxes, some individuals are worried about a potential increase in the capital gains tax rate. As of now, the capital gains tax rate is 23.8 percent. Thus, if someone buys an asset for $10 million yet when they decide to sell the assets, they are worth $20 million, the person will have to pay taxes on the increased value. So if the person decided to liquidate their entire portfolio, they would be paying $2.38 million in federal income tax alone.
While many worry about increases in this tax when Biden takes over as president, tax rates are constantly changing. Thus, if the capital gains tax may increase under Biden, you should probably not sell all of your assets.
Instead of selling your entire portfolio, most people will be better off reviewing their portfolio and financial needs to decide what assets they may sell within the next year or two. In cases where you may sell an asset relatively soon, locking in the 23.8 percent tax rate makes sense. Below are estate planning tools that combat the lower gift and estate tax exemption and increased capital gains tax rate.
Spousal Limited Access Trust
One way to lower taxes when one passes away is to create a spousal limited access trust. This tool allows one to transfer assets into a trust and when the assets get passed on to the beneficiary of the trust, they will still fall under the $11.58 million exemption rather than any new gift tax exemption rates. One important note is that a spousal limited access trust is irrevocable. Thus, once you place assets into this account, you cannot take them out or change who they pass on to.
There are a few more benefits that a spousal limited access trust offers. First, the assets within the trust will be distributed according to the terms you decide on before passing away. Secondly, this type of trust, while meant for spouses, one can also set this account up for children or grandchildren.
Intentionally Defective Grantor Trust
An intentionally defective grantor trust is irrevocable and benefits either a spouse of future generations. Transferring assets into this type of account allows you to save on taxes and preserve the principle of the assets.
529 Savings Plan
529 savings plans are typically for educational expenses. While this is true, in recent years, federal legislation has expanded on what educational expenses encompass. Further, money placed in this type of account can equal the $75,000 per year gift tax exclusion while avoiding taxation.
Additionally, once assets are in this account, they can grow tax-free. Further, if one takes out the money for education expenses, these distributions are not subject to tax. Finally, the person who creates and funds a 529 plan controls these assets until they withdrawing them from the account. Thus, if the creator of the account falls into financial hardships, they could take these dollars out at any time.
Contact our Law Office for More Information
Finally, for more information regarding how a Biden presidency could complicate your estate plan, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding trust and estate law, check out our blog.