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By Jeffrey R. Wolfe, Senior Vice President, Manager of Wealth Planning Strategies

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As the election nears, and in an effort to continue to bring attention to Estate Planning Awareness Week, I have been asked by many whether a change in the President will lead to a change in the transfer tax regime (e.g. gift and estate tax laws). Let’s take a look.

First, it’s important to understand where we are today. Currently, the transfer tax exclusion is $11.58 million, and it is scheduled to increase with inflation until 2026. On January 1, 2026 – barring any action by Congress to the contrary – the exclusion will revert to 2017 levels, which will be $5 million, plus some inflationary increases. This tax regime came about during the Trump administration. President Trump had pressed Congress to repeal the tax, but this became the negotiated law.

On the campaign trail, Trump has not addressed the transfer tax much at all. His platform generally pushes to make permanent the tax changes from the Tax Cuts and Jobs Act, which is where the current exclusion comes from. In other words, the proposal is to end the “cliff” on January 1, 2026, and keep the exclusion as-is with ongoing inflationary adjustments. That said, there’s not really a concrete platform for transfer taxes in the Trump campaign so I’m deducing the position at best.

Former Vice President Joe Biden’s platform is equally vague. Generally speaking, Biden has called for returning transfer taxes “to historical norms.” It’s unclear if that’s the $3.5 million exclusion from the early Obama/Biden administration, or if that refers to the $5 million exclusion that came about during the later Obama/Biden administration, or some other number. What can be inferred is that the platform calls for an exclusion lower than the current $11.58 million exclusion.

Also of note from the Biden campaign, but again not laid out in detail, has been suggestions to modify or eliminate the step-up in cost basis for assets held at death.  As you may recall, current tax law stipulates that any asset owned at death receives a step-up (or potentially a step-down) in cost basis at death. This typically allows an inheriting beneficiary to sell the asset with little to no income tax consequence upon inheritance if done in a short timeframe. Again, there have been no specific details to this proposal provided by the campaign.

With these two ideological regimes in mind, it’s important to remember that a President does not set tax law. Congress creates the laws and the President may sign them into law or veto them, in which case Congress can in turn override the veto of course. Thus, to say that the election of one candidate over the other means a change in these laws is factually inaccurate. Congress would have to move to change the law.

However, recent Presidents have tended to have more involvement in tax policy. Therefore, it is fair to say that depending on who wins, the pressure to move towards their proposals may increase. At this point, though, all we know is without Congressional action to the contrary, the current law calls for a return to the $5 million exclusion in 2026.

Consequently, the time to act on the tax laws is now. If you are in a position to move significant wealth under the current transfer tax regime, you should strongly consider moving forward with that plan. While I don’t know what a new election may bring, I know that if there is no action by Congress before 2026, the transfer tax exclusion will be going down. Thus, utilizing the large current exclusion makes sense as it may be a “use it or lose it” opportunity.

It’s also important to note that if you use the large exclusion now, the IRS has confirmed that they will not try to tax you “retroactively” should the exclusion be smaller at your death, a concept often called “claw back.” In other words, if you use your entire $11.58 million exclusion today with a gift, and then pass away on January 1, 2026, with no change in tax law, the IRS will not try to use the $5 million exclusion in 2026 and try to apply it to gifts made today.

My crystal ball for transfer taxes has never worked. I don’t know where the laws may settle after the election, in 2026, or any other time for that matter. However, I do know that the current transfer tax regime is the most generous in modern tax history. Therefore, if you have the means and desire to utilize the current regime, you should do so, it may or may not be here much longer!

 

The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards & Co. is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.

 

October 21, 2020 |