September 2020

Legal Update: Planning for Election Outcome: Should You Act Before Year End?


We hope that this Client Alert finds you and your family safe and healthy during this unprecedented time of pandemic, unrest and economic hardship. It has been a difficult time for so many with all that is going on in the world.

With an election closely upon us, we are thinking about its future impact. While we do not know what the outcome of the election will be, we are quite sure that, if Joe Biden is elected President, if the House remains in Democratic control, and if Democrats regain control of the Senate, then we will see dramatic changes in the tax laws as early as next year including changes to the estate tax laws.

  • Estate Taxes: The current gift and estate tax exemption is $11.58 million per individual ($23.16 million for spouses). It is commonly believed that this exemption will be reduced substantially in the event of a Democratic sweep in the election. For example, it could be reduced to $5 million, or even $3.5 million per person and it is also possible that the current estate tax rate of forty percent (40%) could rise. Under existing law, the exemption amount is scheduled to sunset at the end of 2025 (and become $5 million adjusted for inflation). As mentioned above, if there is a change in the Administration and Senate, we expect that the exemption amount will be reduced much sooner – possibly effective January 1, 2021.

    In order to capture this exemption before it is reduced, you should make gifts before the end of the year. Although you may decide to wait until after the election to finalize your gifts, if you are interested in making gifts before year end, you must start the planning process now to allow adequate time to analyze your proposed transfer, appraise assets and prepare the necessary documents associated with the transfer.

  • GRATS: Historically low interest rates make GRATs (grantor retained annuity trusts) particularly effective at this time. Even if you are not interested in using your large exemption before year end, you might decide to establish GRATs for children or other beneficiaries while interest rates are so low.
  • Charitable Lead Annuity Trusts: CLATs are also highly effective in a low interest rate environment. If you have charitable intent, and you would like to take advantage of all or a portion of the current large gift tax exemption for the benefit of children or other beneficiaries, you might want to look into this technique as well.
  • Roth Conversions: We anticipate that federal income tax rates could rise under a new Administration, and that state income tax rates will likely rise in California as well. Income tax rates may be lower now than in the future. You may want to discuss with your financial advisers and accountants whether now might be a time to convert your IRA to a Roth IRA. Converting an IRA to a Roth results in a large tax hit in the year of conversion, but thereafter the assets in the Roth IRA grow tax free. Your financial adviser can run analyses to show the benefit of after tax growth over a number of years. Please be aware that recent changes in the law now prevent you from “stretching” the ROTH payments for lives of your children.

If you are interested in making gifts before the end of this year, or if you would like to explore tax planning strategies that might be viable for you, please contact us as soon as possible. We look forward to connecting with you.