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Act Now! The Window of Opportunity to Use High Exemptions May be Closing Sooner Than Expected

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The results of the upcoming election on November 3, 2020 are unpredictable, but they will determine the course of the tax laws relating to estate planning for many years. If the Republican Party prevails in the presidential election and/or maintains control of the Senate, we are likely to see a continuation of the current tax regime implemented under the Tax Cuts and Jobs Act that took effect in 2018. If the Democratic Party prevails in the presidential election, gains control of the Senate and maintains control of the House, then there are likely to be significant changes in the tax laws potentially starting as early as January 1, 2021. This letter is not in any way intended to take a position on any candidate or otherwise influence your vote. Instead, our goal is to alert you that the window of time to take advantage of certain estate planning opportunities under current law might not be available after the end of this year, depending on the election results. 

Current Transfer Tax Exemption

Under current law, every individual can exempt up to $11.58 million of transfers, whether made during his or her lifetime, or by reason of his or her death, or a combination of the two, from gift, estate and generation-skipping transfer (GST) tax. These exemption amounts are the highest in history and are adjusted each year for inflation. On January 1, 2026, however, the high exemptions are scheduled to effectively be cut in half and revert to pre-2018 law. 

Possible Impact of the 2020 Election on Tax Laws

Estate, gift and GST tax exemption amounts have varied greatly since 2000. The makeup of the White House and Congress following the upcoming election is likely to influence where the exemptions, transfer tax rates, and other estate tax planning related laws go from here. Currently, there are proposals aimed at extending these high exemptions beyond 2026. On the other hand, there are legislative proposals from influential legislators to revert to pre-2018 laws (i.e., $5 million exemption indexed for inflation after 2010) or even reduce exemptions to $3.5 million (with or without inflation indexing). 

Even though there has never been a reduction in the amount of the transfer tax exemptions, it is scheduled under current law to occur on January 1, 2026 and could happen as early as January 1, 2021. At the end of 2012, transfer tax exemptions were scheduled to decline from $5.12 million to $1 million beginning on January 1, 2013. Although legislation in early 2013 stopped this reduction from occurring, many people scrambled in November and December of 2012 to take advantage of the higher exemptions that were scheduled to disappear. Our department and other professionals regularly involved in estate planning transactions, such as appraisers, were the busiest we had ever been. Considering the unprecedented government spending necessary to alleviate the economic fallout resulting from COVID-19, it is reasonable to conclude that the government will need to raise revenue and estate taxes are one likely target to do so. In fact, some respected professionals in the estate planning world believe that you may see a reduction in exemptions or other changes effectively increasing transfer taxes regardless of which party controls the White House and Congress for the next four years.

Planning Opportunities in 2020

Any use of exemption that is effective before it is rolled back, whether that occurs in 2026, 2021 or sometime in between, will be locked in under current law. For example, assume you gift $11 million during 2020 to a trust for the benefit of your family and then exemptions are reduced to $6 million in 2021. The entire $11 million you gave away will not be subject to estate tax at your death even though your exemption has been reduced to $6 million.  This puts taxpayers in a “use it or lose it” situation. Exemption is used from the “bottom up”, which means taxpayers only realize a benefit from the increased exemptions to the extent the amount gifted exceeds the exemption amounts under any new law.  Therefore, in our example, if you only gifted $5 million in 2020, your remaining exemption in 2021 would be $1 million and you would not have benefitted from the high exemptions that were eliminated.  This could cost your heirs millions in additional estate taxes.

The easiest way to plan for this uncertainty in future transfer tax laws is to make gifts prior to the end of 2020 when we know the high exemptions will be in place. There are numerous estate planning techniques that can be utilized to take advantage of the increased exemption amounts, such as (1) gifts to spousal lifetime access trusts (SLATs), (2) gifts to trusts for descendants, and (3) forgiving existing loans. These techniques and others are described in detail in our recent blog post. Even if exemptions are not reduced in the future, you would still benefit substantially if you make gifts in 2020 by shifting future growth and income of the transferred assets outside of your estate, and potentially the estates of future generations, for estate tax purposes. 

There is no silver bullet that works best for everyone. Each client’s circumstances are unique and our goal is always to find what works best for our clients and their families. While everyone who has wealth exceeding $11.58 million (or $23.16 million for a married couple) should consider making gifts before the end of 2020, those people who are not currently subject to estate tax, but would be if the exemptions are reduced, also should consider making gifts. It is often the people in this second category with wealth between $5.8 million to $11.58 million (or $10.6 million to $23.16 million for a married couple) who are the most difficult to plan for and require the most time and analysis.   

What You Should Do Next

If you have any concerns about potentially losing out on the opportunity to take advantage of the current high exemptions or any other estate planning opportunities that may be impacted by the election, please contact our department paralegal, Sarah Lovelace, at SLovelace@deanmead.com or 407-841-1200, to schedule a call or meeting with your attorney. You should also feel free to contact your attorney directly. We encourage you to begin the process now instead of waiting until mid-November or December.