Estate Planning in the 2020 Election Year

Transcript

Hi. I am Stacy Singer, an ACTEC Fellow from Chicago, Illinois and I’m here with ACTEC Fellow Ron Aucutt from Lakewood Ranch, Florida. We’re going to talk about the impact of the upcoming election on estate planning decisions.

Estate Planning and a National Election

And Ron, my first question is will the results of the election affect people’s decisions about estate planning and gifting decisions?

Ron Aucutt:  Probably yes for some people, but maybe not for everyone. For example, this year the permanent estate gift tax exemption would be about 5.8 million dollars indexed for inflation each year, but at the end of 2017, the Republican Congress doubled that exemption. So this year is really 11.58 million — still indexed for inflation each year. But there are two important things about that doubling. First, it is effective only for 8 years; it will go back down in 2026 in what’s called a sunset. Second, if there are Democratic gains in this year’s election, it will mean there is a real possibility the 2026 sunset will actually be moved earlier; maybe even as early as next year. So, for people who could benefit from the temporary increased exemption, it may be important to make gifts this year. Gifts like that will probably involve the use of trusts or other estate planning structures and techniques that call for the assistance of ACTEC members or other estate planners.

Stacy Singer:  So, is there any kind of estate planning that people should do regardless of the results of the election this year?

Ron Aucutt: Well, almost any estate planning that has made sense to plan for probably still does, and often the estate planning that is done earlier works best. So if someone has been talking with their lawyer about some estate planning steps, maybe documents have been drafted or at least outlines or summaries have been put together, then now might be a good time to finish those projects — after checking with a lawyer, of course, to make sure those plans and documents are reviewed and are up-to-date and are still appropriate and there are no special circumstances that would make it more prudent to wait. Then, there is at least one big tax break this year that Congress passed in the CARES Act in March to respond to the extraordinary pressures of the COVID-19 pandemic. For 2020 only, the limit on income tax deductions for charitable contributions is increased from 60 percent to 100 percent of adjusted gross income for outright cash gifts to public charities. So, people who are interested in making a large cash gift to charity and getting a big income tax deduction should talk to their tax advisor about making that gift this year. On the other hand, for some taxpayers it might make more sense to wait until income tax rates are increased, say next year, so that waiting to make the gift when the deduction might save more tax might be better. A tax advisor can help with that decision, and of course the taxpayer’s individual charitable interests and the needs of the charity are very important.

Stacy Singer:  That makes a lot of sense. So, have either of the presidential candidates made any proposals that would impact estate planning?

Ron Aucutt: Actually, presidential candidates typically don’t always provide many ideas or details anyway about potential ideas for estate tax changes; but Vice President Biden has referred to what he calls a stepped up basis loophole, apparently referring to the fact that assets transferred from a decedent’s estate at death get a new basis for income tax purposes equal to their value. For example, if someone purchases an asset for $1,000 and then later sells it for $3,000, the capital gain for income tax purposes is the sale proceeds of $3,000 minus the cost basis of $1,000. In other words, the capital gain is $2,000. But if the owner of that asset passes away when the value is $3,000, the basis is changed from $1,000 to the date of death value of $3,000 – that’s the step-up in basis, and then if the asset is sold for $3,000, there’s no capital gain and no income tax. It seems likely that a President Biden would propose treating death the same as a sale so that the basis would indeed be stepped up to $3,000 but the $2,000 step-up would be taxed as capital gain. The same way if someone made a gift of that asset when it had a value of $3,000, then the $2,000 appreciation in value might be taxed as capital gain. This idea has been around since at least the 1960s, but a Biden Administration with a Democratic gain in Congress too might be the most likely scenario for seeing it become law. If so, the simplest proactive action to avoid that gain might be to make gifts now to long-term trusts. The gain would still be taxed, eventually, when the trustee sells an asset, but that timing can be controlled and there are probably some assets that are not expected to be sold, at least not for a long time.

Stacy Singer:  What about any special considerations related to retirement accounts or IRAs?

Ron Aucutt: Yes. Late last year Congress changed the law to require most successors to retirement plan benefits and IRAs (other than the spouse of the plan participant) to withdraw the entire fund over 10 years from the participant’s death, not over the successor’s life expectancy. This is going to require a number of planning techniques involving retirement benefits, especially techniques providing that those benefits pass to a trust upon the participant’s death, to be re-evaluated and very likely changed. On the other hand, in the CARES Act that I mentioned – passed this March – Congress provided rules requiring minimum distributions from a retirement plan or IRA to be suspended for this year, 2020. So, what would otherwise be required minimum distributions in 2020, need not be withdrawn and taxed but may be kept in the plan or IRA. Finally, it is very important for me to emphasize again that decisions about retirement plans, like everything I’ve mentioned in the last few minutes, are things that an individual should discuss with an estate planner or tax advisor to see what course of action is really best for that individual.

Stacy Singer:  Ron, this has been great. This is great information for someone and anyone who is watching, so thank you so much.