The Broad View
Several years ago, the estate and gift tax exemption was scheduled to drop from $5 million to $1 million on New Year’s Eve. Many of us spent the months leading up to that scrambling to take advantage of the higher exemption before the clock turned. Our mad dash, which came at the end of 2012, ultimately turned out to be unnecessary, however, as subsequent legislation retained the original exemption amount.
There’s a similarly eerie feeling of uncertainty today, as November’s election could bring vastly different tax policy. There’s no guarantee that the $10 million individual exemption (currently $11.58 million, indexed for inflation) will be available in 2021. And it’s unclear if income and capital gains tax rates will stay at their current historic lows. Though our advice generally remains the same — stay the course and keep in regular contact with your Private Wealth Advisor — here are some year-end planning strategies with a 2020 twist.
The usual procedure is to defer income and capital gains as long as possible and accelerate deductions (typically, donations made to charity) into the current tax year. However, as the sidebar on the next page illustrates, the election could usher in an era of increased tax rates. Even without a power shift in Washington, the costs of the ongoing pandemic could pressure the government to raise taxes. Here are strategies to consider:
Once you’ve taken stock of possible income tax planning options, consider whether now is the time to take advantage of the historically high estate and gift tax exemption, which is $11.58 million for 2020. Under current law, that amount is scheduled to be reduced in 2026 to $5 million (indexed for inflation), and the Biden platform proposes to return the estate and gift tax exemption to “historic norms.” It’s impossible to precisely gauge what that means, but the accompanying chart shows the wide range in the estate tax exemption over the last two decades.
As you can see, the current exemption is more an outlier than the norm. If you have determined with your Private Wealth Advisor that you have the financial capacity to do so, consider using as much of the available $11.58 million exemption as possible. Treasury regulations finalized in 2019 ensure that gifts made using your exemption in the year of transfer cannot be “clawed back” later if the exemption decreases. This guidance also makes clear that the exemption is use-it-or-lose-it — if you gift $5 million and the exemption later decreases to $5 million, you have no remaining exemption and the additional exemption is lost.
Not everything is different in 2020. Don’t forget these tried-and-true year-end planning strategies.
Your Private Wealth Advisor can discuss the pros and cons of each strategy, and our Wealth Advisory Group can model different scenarios and evaluate the likely financial impact to you. This material does not constitute legal or tax advice, and you should consult your tax and legal advisors before engaging in any tax or estate planning strategy.
Democratic presidential nominee Joe Biden has proposed a variety of tax changes. His ideas are in draft form, with key details still to come, and may not be enacted even if Biden is elected. Nonetheless, here’s a quick summary of his plan at this point: