With Democrat Joe Biden positioned to become the 46th president, many wealthy families are reconsidering their approach to estate planning and gift and estate taxes.
Current U.S. law exempts up to $11.58 million from gift and estate taxes — double the exemptions allowed before the 2017 Tax Cuts and Jobs Act.
These exemption levels are set to expire at the end of 2025, but the Democratic victory in November 2020 could bring changes earlier and possibly lower the exemptions even further than pre-2017 levels, said Kerry Michael Finn, a senior trust advisor at City National Bank.
"I've been reminding everyone of the 2025 sunset on the higher estate and lifetime gift tax exemptions for the past two years," Finn said. "This year, with the election, it's especially important to encourage individuals and their families to have these conversations."
Many high-net-worth individuals already are exploring different strategies to accelerate the transfer of assets to their heirs. Here's a look at potential changes in tax law and some of the moves that families might consider now.
Potential Changes in Tax Law
Joe Biden has called for returning estate taxes to 2009 levels, which could mean a top rate of 45 percent — versus the current 40 percent rate — and a $3.5 million exemption limit.
Biden also has indicated he would eliminate a tool that helps families mitigate capital gains tax burdens for heirs —the "step-up" in basis that values inherited assets on the date of the benefactor's death rather than on the purchase date.
This step-up can eliminate or drastically cut capital gains taxes on assets that have grown in value over many years, since the deceased family member purchased them.
It's the possible reduction in the $11.58 million estate and lifetime gift tax exemption, however, that appears to have prompted wealthy families in recent months to explore immediate changes to their giving and estate-planning strategies.
"That's really driving a lot of the discussion right now," said Gaye L. Chun, a senior wealth planner at City National Bank, noting that such a change could make a multi-million-dollar difference for many families.
That possibility, combined with record low interest rates, may make it particularly advantageous for those with considerable assets to accelerate giving in 2020, Finn said.
“You have a perfect storm to allow for families to transfer assets either to their kids or grandkids today, usually by way of trusts," he said, noting that a married couple could preserve $23 million for their estate by acting to transfer assets this year under the current exemptions, rather than waiting.
“That's why a lot of people are accelerating their plans to gift to their kids," he said.
Ways to Act Now
Various types of irrevocable trusts can serve as effective vehicles to preserve family wealth. And while these estate-planning tools can provide great financial benefit, they also require significant forethought.
"It's not something you can take back," Finn noted. "It's a true handing it off to someone else."
If you are interested in proceeding with accelerated giving, there are several strategies to consider, including:
- A spousal lifetime access trust. Also known as a SLAT, this tool for high-net-worth couples allows one spouse to transfer assets to the other. For instance, a husband can transfer up to $11.58 million gift-tax-free to his wife, who may use those funds as needed in her lifetime. Not only does this irrevocable trust strategy allow the couple to enjoy an income stream from the assets, Chun noted, it also allows children, grandchildren or other beneficiaries who would eventually inherit the assets to avoid further estate tax consequences, since any appreciation in value is spared from taxation at the death of both the benefactor and the spouse.
- Philanthropy. Wealthy clients may pursue charitable strategies, including donor-advised funds, family foundations, trusts and direct donations. A charitable lead trust allows philanthropic individuals not only to support qualified organizations but also to set aside funds for family members or others, providing tax advantages for donors and beneficiaries. The trust makes payments to one or more charities for a specified period, after which beneficiaries receive the assets. A couple could allocate $20 million to the charitable lead trust, providing cash flow to a philanthropic cause for 20 years, with the principal later going to their children without incurring estate tax, Finn noted.
- A GRAT. A grantor retained annuity trust, or GRAT, enables wealthy individuals and couples to transfer assets while receiving annuity payments — and to freeze the value of those assets to benefit their heirs later. Families set trust terms based on their particular needs, Finn said, noting that no single strategy will work for every individual or every family.
- Life insurance premium financing. With this strategy, an individual can borrow at today's low interest rates and use the funds to pay their life insurance policy, paying off the loan once the policy's value has grown sufficiently, Chun explained. For example, by paying $8 million in premiums now, a wealthy parent or spouse may be able to transfer $40 million to heirs estate-tax free, she said. The prospective cost to the individual would be the interest payments on the loan.
- A family limited partnership. Those with family businesses might explore a family limited partnership, which offers estate- and gift-tax savings and allows owners to transfer interest in the enterprise over time while maintaining control and lowering the value of their estate subject to taxation.
Individuals and families considering changes shouldn't delay in consulting with their financial advisors, accountants and lawyers on the most suitable options.
“The challenge is, it takes time," Finn said, noting that clients need to identify the assets to transfer, create trusts and decide on their gifting or selling strategies now as opposed to later.
Need to discuss your wealth plan with an advisor and wish to find one? Get in touch with a City National advisor today.
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This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.
City National, its managed affiliates and subsidiaries, as a matter of policy, do not give tax, accounting, regulatory or legal advice. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies presented, taking into account your own particular circumstances.