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Potential Tax Ramifications of Election Results

November 12, 2020

 

Whatever you may think about the results of our recent presidential elections, you should consider the tax ramifications that will likely result.  One of the possible ramifications of Joe Biden becoming our President elect is the potential negative impact on estate, gift and capital gains taxes. The Biden administration may not only reverse some of the Trump administration’s enhanced estate tax exemptions, but may go beyond and may even reduce, if not eliminate, some of the exemptions available under the Obama administration.

During the Obama administration, the estate tax exemption for U.S. citizens was increased to $5 million per individual, indexed to inflation. During the Trump administration, that amount was doubled to $10 million per U.S. citizen, indexed to inflation. During the Biden administration, the exemption amount could go as low as $0, although that may be unlikely, particularly if the Republican party continues to hold a majority of seats in the US Senate. However, it would be unlikely for the Biden Administration to try to amend the rules retroactively, prior to the year in which he first serves as President (2021), given the reliance of the public on existing tax codes.  Also bear in mind that the estate tax rates are also potentially subject to increase.  The portability of unused estate tax exemptions between spouses could also be at risk.

There is also discussion of an elimination of the Step Up in Basis for capital gains tax purposes. Under our current rules, when a person dies, any capital gains taxes that may have been due on the sale of an appreciated asset, would be eliminated upon death.  It would be as if the heirs bought the property from the decedent on the date of death at fair market value for purposes of establishing their new basis in the property. In the event that the Step Up in Basis rules are eliminated, the heirs would potentially acquire the decedent’s original basis in the property.  By way of example, if property A was purchased years ago for $100 and is worth $1000 on date of death, the decedent’s basis is the $100.  The beneficiaries’ basis under the current rules would become the $1000 but if the rules change as indicated, the beneficiaries would now only have the $100 basis.  In this case, when they eventually sell the property, they would pay the full capital gain taxes upon sale of the property in addition to having to pay the potentially increased estate taxes.  Since a beneficiary will no longer enjoy a Step Up in Basis on death, there may be no reason to keep the asset in the estate for that purpose.

The estate tax exemption can also be used during one’s lifetime to make gifts free of gift tax (but would leave that much less exemption available for the  remaining estate upon death). Ordinarily, there is a gift tax due for gifts to any individual beyond the federal annual exclusion amount of $15,000 per recipient currently.  There is no New York State gift tax.  The current lifetime exemption (currently $10 million per citizen indexed to inflation) allows an individual to make gifts in excess of the annual exclusion up to any remaining lifetime exclusion amount, without fear of gift taxes.  To the extent that such exclusions do not apply, the gift tax rate can be as high as 40% of the value of the gift in 2020.  In the event the exemption is reduced, the ability to gift during lifetime is also reduced. One should strongly consider making whatever transfers are recommended before the end of the 2020 year.

In the less than two months remaining before the end of the year, it is clear that we estate tax practitioners will be kept extremely busy. In my own office, I have seen a large increase in clients coming in to review their estate plans with hopes of taking advantage of these greater exemptions while they are still available.  Please bear in mind that estate taxes on large estates can be nearly as high as 50% of the value of the assets distributed by the estate beyond the available exemption amount.  Therefore, the loss of $5 million in exemptions could translate to nearly $2 1/2 million of additional estate taxes for some.  As New York State matches the Obama administration federal exemption amount, this effect could be compounded, if the exemption amount is reduced below the Obama Administration levels.

Lastly, while it is impossible to predict exactly what form the new rules may eventually take, I would wager that capital gains tax rates may be higher under the Biden administration than at present. Strategic sales and gifts of properties before the end of the year may be a discussion worth having with your attorney and financial advisor.  This article is not intended to be used as financial or legal advice.  It is intended to raise discussion points for you with your advisor.

Only time will tell as to which of these issues will actually come to fruition and to what degree, but the message remains the same.  Act before the end of the year. 

 

 

 

 

 

 

Prior results do not guarantee a similar outcome. All information posted is general advice only, based upon the rules of NYS, and is not intended to be a substitute for personal legal advice. Although information provided here was accurate as of the date of posting, laws change frequently and rules in other jurisdictions may differ. Therefore, readers should not rely upon these postings but should consult an attorney to discuss their specific factual situation.

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