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Estate Planning Implications Of 2020 Election


This article is for informational purposes only and is not in support of or opposed to the items listed below. You probably have had enough of that by now.

The “left” and the “right” have very different platforms and thoughts on the world of estate planning. Without getting into all of the technicalities, the main difference is each political party’s philosophies on how assets should (or should not) be taxed at the death of the owner. Overall, this is one of the most tax-friendly times in history when it comes to taxes from your estate after you pass and taxes to beneficiaries who receive an inheritance.

1. Estate Tax/Lifetime Gift Exemption Amount

After the 2017 Tax Cuts & Jobs Act was passed, the federal estate tax exemption (which is how much an individual can pass to his/her heirs between lifetime gifts and inheritance after death) was increased to over $11.58 million per person. For a married couple, this allowed them to pass over $23 million combined. This means that any individual could pass $11.58 million to his/her heirs through a combination of lifetime gifts and whatever was left in his estate after he passed away without paying any estate tax. The estate tax would only be applied on anything over $11.58 million.

As of right now, republicans generally want to keep this amount the same or do away with the estate tax altogether. A republican win will most likely extend this exemption or even do away with the federal estate tax once and for all. The democrats would like to return things to the way they used to be by having a lower the amount of the exemption (which is the amount you can pass on without paying any tax). Depending on who you talk to, the general consensus is that the democrats would prefer to tax anyone who passes more than $2 million - $5 million per person (double for a married couple) to their heirs.

2. Estate Tax Rate

As of today, any assets that are subject to estate tax at someone’s death (exceeding the $11.58 million per person) are taxed at the federal level at 40%. Therefore, if someone passed away and had $1 million that was above the exemption amount (and was therefore subject to estate tax), the estate would have to pay the federal government 40% of that excess amount (total of $400,000), before the remaining amount was passed on to the heirs.

Republicans seem to be content with the 40% estate tax rate as it stands today (assuming they do not abolish the estate tax completely). There has not been any real movement by this side of the aisle to make any significant changes to the tax rate in a number of years. On the other side of the aisle, democrats support raising the tax rate. Although there has been limited specifics, the general consensus is that the democratic party favors a tax rate that is closer to “historical norms”. In years past, the estate tax rate has been much higher than it is today (along with the amount that families can pass on tax-free being much lower in years past than in 2020). Experts predict that an estate tax rate in the neighborhood of 50%-60% would be the most likely “landing spot” if the democratic party was able to pass legislation to make the changes. It is highly unlikely that the estate tax could reach the levels of the mid 1900's (over 75%).

3. Step-Up Basis

The “Basis” or “Cost Basis” of an asset relates to how much an individual paid for an asset when he or she bought it vs. how much it appreciated (or grew in value). Normally, if you purchase $100 worth of stock, and then sell it for $2,100, you have a gain in value of $2,000. That $2,000 gain will be subject to capital gains taxes. However, under current law, when someone passes away, the people who inherit the assets (stock, house, etc.) receive what is known as a step-up in cost basis, which goes to the value of the asset on the day the person passed away. The advantage is that any gains/appreciation in value during the original owner’s lifetime are not subject to any sort of capital gains tax if they are passed through an inheritance. In the example above, even though the stock was purchased for $100, when the children inherit the stock (which is now worth $2,100), they will receive a step-up in cost basis to $2,100. If they were to sell the stock right now, there would be no capital gains tax applied to that sale.

Right now, the republicans have no plans to change this tax benefit for those who receive an inheritance at death. They want to keep the current laws in place that free the family members who receive the assets from having to pay taxes on the appreciation of the asset while the original owner was still alive. On the other side of the aisle, the democrats are in favor of repealing the step-up in basis. Using the example above, when the original stock-owner passed away, the heirs would be subject to the same capital gains tax on the $2,000 that the stock appreciated in value when they sell (just as if the original owner sold the stock himself or herself).

Overall, these are two very different philosophies. Historically, there has never been a period where families could pass so much wealth to their heirs with such a low tax burden. It is very “cheap” to leave an inheritance, because of the large amount that can be passed on tax-free, the (relatively) low estate tax rate, and the step-up in basis that eliminates capital gains tax on inherited assets. Certainly, arguments can be made both ways. The republicans generally want to lower (or eliminate) instances where an estate is taxed at death. The democrats are seeking to return the tax rates to more traditional and historical levels.

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