Judd Matsunaga, Esq.
Do you remember learning about our government from your old high school civics class? The Constitution of the United States divides the federal government into three branches to make sure no individual or group will have too much power: Legislative, Executive and Judicial.
In just the past few weeks, we have seen all three branches of our government in action. In late September, President Donald Trump nominated Judge Amy Coney Barrett to become the 115th associate justice on the United States Supreme Court. Next, Democrat Joe Biden won the presidential election that was held on Nov. 3.
And finally, a Georgia Senate runoff on Jan. 5 will determine whether the Democrats will control both houses of Congress. “Say what?” The Legislative Branch consists of the House of Representatives and the Senate, which together form the United States Congress. A bill must pass both houses of Congress before it goes to the president for consideration.
The House of Representatives is made up of 435 elected members. The Senate is composed of 100 Senators. The vice president of the U.S. serves as president of the Senate and casts the decisive vote in the event of a tie in the Senate.
That means that even if President-Elect Biden is inaugurated as the 46th president of the United States on Jan. 20, 2021, he might not be able to implement his tax plan.
Why? Although the Democrats currently own a majority in the House of Representatives, the Senate remains unresolved.
So, for the Democrats to effectively change tax policy, they will need both Georgia seats to ensure Biden’s tax plans can become reality.
That is why “year-end” planning for Americans will be more challenging than ever in 2020, as we are forced to make year-end financial decisions based on events that will not happen until 2021. If the Republicans retain control of the Senate, i.e., win one or both of the two runoffs, legislative gridlock will likely prevail for another two years.
Estate and gift planning may be less a 2020 year-end priority given the reduced risk of a reduction in the unified credit or an increase in estate and gift tax rates in 2021. However, the increased estate tax lifetime exemption that sunsets in five years presents an extraordinary opportunity to effectively transfer wealth tax free.
The current $11.58 million lifetime gift and estate tax exemption is scheduled to sunset on Dec. 31, 2025. Given this reduction is almost certain to occur, a wealth-transfer plan should be developed now, so that you can permanently take advantage of this higher exemption amount.
Should Democrats win both Senate seats, they would be able to act unilaterally for the first time since 2010, setting the stage for major tax increases on businesses and high-income, high-net worth households. Should this occur and increases are enacted retroactive to Jan. 1, 2021, numerous income acceleration and estate planning gifting strategies should be deployed before year’s end.
A recent article posted on www.cnbc.com (Oct. 14) stated that “rich kids could get hundreds of billions from their parents if Biden wins.” The “ultrawealthy” are taking steps now to create trusts and prepare large transfers so they can drop the money before 2020 ends if they have to.
The savings could be substantial. For example, a couple leaving $20 million to their kids would currently pay no estate tax, since up to $23.2 million is exempt. Biden’s tax plan would cut that limit to $7 million and increase the current estate tax rate from 40 percent to 45 percent.
If Biden gets his tax plan, the same couple would pay $5.9 million in taxes on a $20 million gift.
Combined with the possibility that the estate tax exemption could be cut in half or more, another significant Biden proposed change is with regard to the “basis step-up” at death. For generations, a hallmark of our estate tax system is that everybody gets a stepped-up basis on death.
Currently, a future capital gains tax upon disposition of an inherited asset is based on its value at the time it is inherited, rather than the time of purchase — referred to as the “basis step-up.” This allows families to avoid paying capital gains on appreciated assets that are passed down or given at death.
The Biden plan is unclear as to how this would be implemented, but there are two options. The first is to tax unrealized gains of the decedent. Heirs would get hit at the transfer, regardless of whether they sell the asset. The decedent’s estate would pay the tax at death, and presumably the heirs would take the assets at a basis stepped-up to fair market value.
Alternatively, the heirs would receive carryover basis at death and would pay capital gains tax on the sale of the asset based on the value at the time of the original investment. Either option would lead to a significantly higher income tax liability for appreciated assets. Regardless of the option chosen, taxpayers should seriously consider a wealth-transfer plan prior to year’s end.
Legislation is always unpredictable, and so are the effective dates that new legislation takes effect. So, wealthy families are speeding up their plans to pass down real estate and other assets to their kids before the end of the year in case new law takes effect retroactively from Jan. 1, 2021.
Some have called this election a “Rich Kid Windfall.” Of course, the “kids” may not receive the money for years, since irrevocable trusts can be structured to delay any payouts. So, if you have an estate worth in excess of several million dollars, try to see a qualified estate planning attorney and CPA as soon as possible — it could be worth several million in savings!!!
Judd Matsunaga is the founding attorney of Elder Law Services of California, a law firm that specializes in Medi-Cal Planning, Estate Planning and Probate. He can be contacted at (310) 348-2995 or judd@elderlawcalifornia.com. The opinions expressed in this article are the author’s own and do not necessarily reflect the view of the Pacific Citizen or constitute legal or tax advice and should not be treated as such.
