HOW WILL THE ELECTION RESULTS AFFECT YOUR ESTATE PLANNING?

Now that President Joe Biden has taken office and the Democrats have narrowly taken control of both Houses of Congress, it is likely that there will be changes to our tax laws.  We will focus on gift and estate taxes.

Given that the priority right now is on the Coronavirus and the President’s recovery plan (including implementing the recently passed stimulus bill), it is unlikely that there will be any changes to the gift and estate tax laws until at least later in the year.  Also, since the Budget Reconciliation process (which allows tax legislation to be passed by a simple majority and no filibuster) can be done only once in a fiscal year, it is likely that any gift and estate tax law changes would occur in the next fiscal year that starts October 1.  Any legislation would likely require the vote of all 50 Democrat Senators.

What changes can we expect?  You may recall that the Tax Cuts and Jobs Act of 2017 doubled the $5 million exemption to $10 million (with the additional $5 million often referred to as the “bonus” exemption).  The exemption is set to go back to the “basic” exemption of $5 million at the end of 2025 unless further legislation is passed.  With inflation adjustments, the exemption is currently $11.7 million.  President Biden as a candidate proposed reducing the gift tax exemption to $1 million and the estate tax exemption to $5 million per person (adjusted for inflation) or even lower to $3.5 million.

Note that the Connecticut exemption is currently $7.1 million, increasing to $9.1 million in 2022, and matching the federal exemption starting in 2023 (unless Connecticut changes its law).  New York has no gift tax but does include taxable gifts made within three years of death in the estate of New York residents or those owning New York real property or tangible personal property at death.  The New York estate tax exemption amount is currently $5.93 million and adjusts annually for inflation.

Is there a benefit to making a large gift in 2021 before Congress acts?  If you made a gift of the Connecticut gift tax exemption amount of $5.1 million last year, does it make sense to gift $2 million to use the additional Connecticut exemption?  To lock in the bonus exemption, the gift made must be greater than the basic exemption (or whatever the new exemption amount is after legislation is passed).  For example, if you make a gift of $6 million and the exemption then goes down to $5 million, you locked in $1 million of the bonus exemption.  If the gift tax exemption goes down to $1 million, then any gift over $1 million would lock in the exemption over $1 million.  Of course, whatever the amount of the gift, there are still benefits to gifting in that the future appreciation will be out of your estate.  With any gift, one must factor in the loss of a step-up (or step-down) of income tax basis of assets had the assets been held until death and the elimination of built-in capital gains.  However, one proposal has been to eliminate step-up (or step-down) in basis and tax the built-in gains upon sale of the assets or perhaps even at time of death.

While most legislation is effective once it is passed and signed by the President, Congress has occasionally passed laws which are effective as of the date the bill was introduced or even retroactive to January 1 of that year.  It is also possible that any law reducing the exemption passed on or before December 31 will apply to all gifts made during this year.  Is there a way to use the bonus exemption now but not bear the risk of paying federal gift tax if the federal gift tax exemption is reduced retroactively?  One relatively straightforward method would be to make a gift to a “QTIP” type trust (i.e., mandatory income to your spouse, and your spouse is the sole beneficiary of the trust until the spouse’s death).  This allows you to make a marital deduction election in 2022, if needed to avoid gift tax liability.  There are other, more complex options which we can discuss with you in more detail.  For more information, please contact Lisa F. Metz (lmetz@brodywilk.com) or another BW attorney.

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