Estate Planning Considerations For Year End 2020

Lifetime Gifts to Take Advantage of Current Exemptions

In December of 2017, the U.S. Tax Cuts and Jobs Act (“TJCA”) doubled the federal estate, gift and generation-skipping transfer (GST) tax exemptions from $5 million to $10 million, indexed for inflation ($11.58 million in 2020). These increased exemptions are scheduled to “sunset” and revert back to their pre-TJCA level of $5 million, indexed for inflation, on January 1, 2026. If Joe Biden wins the 2020 presidential election and if the Democrats win back control of the U.S. Senate, however, it is possible that the increased exemption amounts will be repealed sooner and could even be cut back by new legislation below $5 million. 

High net worth individuals should consider making gifts now to take advantage of the increased exemption amounts before they possibly expire or are repealed. The IRS has stated that even if the estate and gift tax exemption amounts are reduced to $5 million or lower, lifetime gifts in excess of that amount made before the exemption is lowered will still be protected from estate and gift tax. In order to benefit from the current higher exemption, however, total lifetime gifts must exceed the amount of a future lower exemption amount (so, for example, if the exemption falls to $5.5 million, total gifts prior to the decrease must exceed $5.5 million to make use of the currently higher exemption).

Possible Repeal of “Stepped-up Basis”

A Biden presidency could also mean the end of the so-called “stepped-up basis.” Current law provides that the cost basis in property inherited from a decedent equals its fair market value on the decedent’s date of death. This step-up in basis can result in a large reduction or elimination of capital gains taxes on that property upon later sale.

The current Biden tax plan calls for a repeal of the stepped-up basis rule and does not call for a reduction in federal estate, gift and GST exemption amounts. Other Democrats in Congress, however, have introduced legislation calling for a reduction in the exemption amounts.