The election is over….sort of…while it appears rather certain that Biden will be our next President, President Trump has yet to concede.  It seems clear that the House will retain its Democratic majority and the Senate’s majority will likely be determined by a runoff in Georgia on January 5, 2021.

Biden’s proposed tax plan includes several changes that could affect your estate plan, such as: lowering the current estate tax exemption from $11.58m to as low as $3.5m, potentially decoupling the unified gift and estate tax exemption and providing for a $1m lifetime gift tax exemption, and eliminating the step-up in basis at death.  Additionally, commentators have suggested that some of the tax initiatives could be made retroactive to January 1, 2021, pursuant to the Omnibus Budget Reconciliation Act of 1993.

What happens if the Senate remains in the Republican’s hands?  Will Biden’s tax agenda come to fruition?  No one has a crystal ball, so where does that leave those who want to use the large estate tax exemption currently available or who are just in the middle of finalizing their estate plans in this later part of 2020?

• DON’T LET PERFECT BE THE ENEMY OF GOOD. If you have already started your plans, don’t let the uncertainty of the Senate race derail finalizing your documents.  While it’s important to review your plan and goals in light of the election cycle and new tax laws that may come as a result of those elections, having a plan that works based on what you know this minute is always better than having no plan at all.
• USE IT OR LOSE IT. The current gift and estate tax exemption for 2020 is $11.58m for an individual or just shy of $24m for married couples.  If you can afford to use your entire exemption now, it’s worth discussing with your advisor.  What we do know is that the current exemption is set to sunset in 2026 to $5m adjusted for inflation regardless of the election cycle.  Because of that, even if the Republicans hold the Senate, this may be an area where both parties can agree to a change now.  The exemption is a “use it or lose it” proposition.  Meaning, if you don’t use the current exemption and it later is reduced (some expert says possibly to $3.5m) then you have lost the ability to pass approximately $8m tax-free to your loved ones (based on a $3.5m exemption).
• KEEP AN EYE ON THE STEP-UP IN BASIS PROPOSALS. Currently, if you inherit an asset, such as a piece of real estate or stock, your basis in that property is the fair market value of the property on the decedent’s date of death.  That means if you turn around and sell the asset the next day, there is $0 capital gain.  This may result in a huge financial impact in the instance where a decedent purchased the asset for $100k and on his death it is worth $1m.  If the decedent had given you the property during your life or he had sold it, he would have recognized $900k in capital gain.  It is unclear whether Biden’s plan would replace the step-up in basis with a carryover basis or gain recognition at death.  In either instance, your planning may be significantly impacted by any changes to the current step-up in basis at death rule.

The above analysis is merely a snapshot of potential legislation and in no way represents a full analysis of every proposed or anticipated piece of legislation relating to the topics discussed herein.