Most estate planners say the 2017 tax law made the estate tax rules permanent. But permanent doesn’t mean the same thing in Washington, D.C., that it does in the rest of the country.
There’s a good chance the estate and gift tax will change substantially after the 2020 election, and you should prepare for key changes now.
I’m not an election prognosticator and things can change, but the results of the recently concluded 2019 elections indicate there’s a good chance that after the 2020 election, Democrats will control both houses of Congress and the presidency.
The 2020 campaign so far has made it clear that changing the estate tax, reversing many of the changes since 2000, will be a priority if Democrats win.
The 2020 candidates make clear that if they win estate and gift tax exemptions are likely to be decreased, and some key tools to reduce estate taxes probably will be curtailed or eliminated.
A bill recently was introduced in the House of Representatives to do such things. It won’t pass this year or in 2020, but it will be a priority in 2021 if Democrats dominate the federal government. You should take advantage of the current estate tax while you can and prepare for significant changes to occur in 2021 and 2022.
For example, the current exemption of over $11 million is likely to be reduced to $5 million or less. Bernie Sanders said he would reduce the exemption to $1 million. If your estate exceeds $5 million, consider using the current exemption to reduce the size of your estate by making gifts or transferring property to trusts.
Reduce the size of your estate while it is tax-free to do so. That should be safe to do, because if the exemption is lowered, the new law isn’t likely to “claw back” tax gifts that were made when the exemption was higher.
The annual gift tax exclusion, currently $15,000, also might be reduced.
Many people set up their estate plans so that their spouses will inherit all or most of their estates, either directly or through trusts such as a qualified terminable interest property (QTIP) trust.
That makes sense at the current exemption levels, especially when the portability provision transfers the deceased spouse’s unused exemption amount to the surviving spouse. But if the exemption amount is decreased, there could be a heavy tax burden on the estate of the surviving spouse, especially if the portability provision is removed. It is a good idea to begin considering ways to change your plan and adopt a new one.
Some types of trusts also are likely to be targeted.
The grantor retained annuity trust (GRAT) is popular, especially among business owners. But those who have been targeting it for change or repeal for several years are likely to prevail if there’s a power shift in Washington.
Other types of trusts also are likely to face changes, as could family limited partnerships and other important strategies.
Trusts and other strategies are likely to be grandfathered, so any new law wouldn’t affect those created during 2020. That’s why it’s a good idea to work on your estate plan beginning early in 2020. Put in place any strategies like these that you’ve been considering but haven’t acted on.
Also, meet with your estate planner to ensure the i’s are dotted and t’s crossed for the strategies already in place.
Remember the value of your assets is likely to increase over time. If your estate is comfortably under the exempt amount now, it probably won’t be in five, 10, or 20 years, especially if the exemption is reduced.
Don’t procrastinate by waiting for the actual election results.
If you do, your range of options is likely to be limited. Begin meeting with your estate planner early in 2020. Set up and begin implementing your plan before the election. We don’t know how far back any grandfather provisions will go. We do know that your options could be limited after 2020.
By starting now, you have an extended period to reflect on the options. You won’t be making rushed decisions under a tight deadline like the many people who will wait until after the election.