Playing Poker with Awful Odds: Our Tax System at Risk

Few families face the risk of paying a 40% federal estate tax while the exclusion is $23 million for a married couple and half that for a single taxpayer. A substantial number of families benefit from the step-up in income tax basis that occurs at death, essentially eliminating capital gains taxes that would have been owed if the same assets had been sold during one’s lifetime.

A change in control in Washington, together with the federal government’s need to pay for printing trillions of dollars to respond to COVID, are likely to change that, as soon as January 1, 2021. What’s at risk?

• A reduction in the federal estate (death) tax exclusion to as little as $3.5 million. At a 40% tax rate, this reduction would cost a family $3.2 million in tax for one parent and twice that for two.
• A reduction in the federal exclusion for lifetime gifts to $3.5 million or less. This would abruptly curtail the ability to offload assets and spare both their value and growth in their value from death tax.
• Elimination of the annual exclusion from federal gift tax, currently $15,000 per donor, per recipient. Many families rely upon this exclusion to fill financial needs of the next generation or two and to fund irrevocable life insurance trusts.
• Elimination of the step-up in basis that is “free” when one dies. This would impact most families in America, not just those of high net worth! Ironically, it would also eliminate the reason why many parents wait to transfer assets until they die by creating parity in the tax results of gifts and transfers at death. But it would be too late to make substantial lifetime gifts, because the exclusion would no longer be at the level it is now!

If you act now, the current exclusion offers ample opportunities to structure your wealth in a way that will avoid or minimize estate and gift taxes even if the exclusion is reduced dramatically in the near future. Some techniques allow a married couple to take advantage of the current exclusion while maintaining access to transferred assets if you need them.

A change in administration could also threaten the full deductibility of charitable gifts; thus taxpayers may want to accelerate their planned gifts into 2020 to obtain the best tax benefit of the deduction. Tax proposals beginning for 2021 would give charitable deductions the benefit of only a 28% income tax rate, a potentially significant reduction for those in higher tax brackets that have a marginal tax rate above 28%. Making charitable donations before the end of the year would allow you to take advantage of the current deduction, whatever your tax rate.

Please contact Jay Wagner to discuss opportunities as soon as possible, or reach out to the Stevens & Lee attorney with whom you regularly work.

This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.