Election Results Provide Some Estate Tax Clarity

Adam J. Centner

With the election behind us and our attention now focused on an incoming Biden administration, clients may want to know what this means for them from an estate tax perspective. 

The truth is, we still don’t know for sure.  Control of the Senate for the next two years will come down to two runoff races in Georgia in early January, and any drastic changes to estate and gift tax laws will likely depend on the outcome.  If Democrats sweep the runoff election, a reduction in the estate and gift tax exemption amounts to between $3.5 and $6 million per person (down from $11.58 million this year) is possible, but even then, that result will not be known until 2021.  Democrats would also hold a slimmer-than-predicted majority in the Senate (assuming the Vice President will break any Senate tie in Democrats’ favor), potentially leading to tamped down tax proposals and the elimination of the more controversial changes.  If Democrats do not sweep, significant estate tax law changes seem even less likely.  As is, we expect the exemption amount to adjust to $11.7 million per person in 2021, and it remains on track to increase gradually until it is reduced to around $6 million in 2026 in accordance with the 2017 tax act.  

An elimination of the basis adjustment at death, as proposed by then-candidate Biden, also seems unlikely to pass, although this measure is less controversial than estate tax changes even though it affects individuals across the wealth spectrum.  We will continue to plan for flexibility in clients’ documents to maximize the law that exists at the time of the client’s death, so affirmative action by the client is not necessary.

The message to most clients for now: stay put.  We generally do not advise clients to make significant year-end gifts when the benefit is not certain, so we can expect a relatively quiet end of 2020 from an estate and gift tax planning perspective.  Because it’s never too early for an estate planning attorney to plan ahead, however, the next best chance for significant changes to the estate tax regime seems to be the November 2022 elections, where Republicans have 22 seats in play and Democrats have 12. 

One takeaway from recent years is that the estate tax, gift tax, and generation skipping transfer tax exemption amounts are always in play, and clients should always prepare for changes. 

Although significant gifts are generally not advised for estate tax planning purposes right now, we should continue to think about ways to reduce a client’s taxable estate.  It is likely that irrevocable life insurance trusts (ILITs), which have taken a backseat in recent years given the high exemption amounts, will play a bigger role in planning conversations.  High net worth clients should also consider regular annual gifting, as every $15,000 annual exclusion gift saves a taxable client’s estate $6,000 in estate tax. 

More complex planning tools, such as grantor retained annuity trusts (GRATs) and charitable remainder trusts should also be discussed.  Some commentators believe GRATs, particularly short-term GRATs, will be viewed unfavorably by a Biden administration, but until the law is changed or executive order comes down, there is no sense in avoiding this planning vehicle. 

Because many of our clients are not at risk for estate tax, the primary focus for most will remain on the orderly transfer of wealth, asset protection, and probate avoidance.   

To discuss how the election will affect your clients, or any other estate planning matters, please call Adam Centner at 513.579.6488 or email Adam at acentner@kmklaw.com.