The Estate Planning Team at Davis Wright Tremaine LLP issues Advisories on a regular basis to communicate important law changes and other matters of interest to our clients, their advisors, and our friends. We are circulating this Advisory update after over six months of the COVID-19 era and in anticipation of the November federal election.
Calendar year 2020 has been a difficult year for all of us. We have been hard at work throughout the pandemic, initially remotely (pursuant to the Governors' orders) and more recently partially in our offices as part of a limited reopening. We have been doing everything in our power to make sure clients have been able to access and update their estate planning documents and plans in response to the pandemic and other issues. We have spent more time in gloves, masks and other personal protective equipment than we ever would have imagined. We are happy to report that while our clients, their families and loved ones have not been immune to COVID-19, most are well and the few who have contracted the disease are, for the most part, recovered.
You have probably seen media reports speculating on the outcome of the 2020 federal election, some specifically on the potential impact on federal taxes. While we are not in a position to opine on future election results, there are some points to consider based on proposals by the candidates.
First, recall that the Tax Cut and Jobs of 2017 Act (the Act) made significant changes to corporate and personal federal tax rates and exemptions. Specifically, the Act increased the federal estate, gift and generation-skipping transfer tax (GST) exemptions to what is now $11.58 million per person (from $5.49 million per person). That increase in exemption amount is scheduled to sunset at the end of 2025 with a reversion to the pre-Act exemption of $5 million per person indexed for inflation.
There is a general expectation that if the Democrats win the White House, retain the House, and take control of the Senate this election, there will be federal tax legislation passed in 2021 which may be retroactive to January 1, 2021. Democratic candidates have proposed reducing the federal estate, gift and GST exemptions to or below their pre-Act levels.
In addition, other proposals have called for increasing corporate and personal income tax rates, raising capital gain rates to match ordinary income rates, and changing income tax deductions for 401(k) salary deferrals and IRA contributions to a tax revenue neutral credit. There is also a concern that the use of certain estate planning strategies, such as grantor retained annuity trusts (GRATs) and valuation discounts for minority interests, could be restricted or eliminated.
Such election related concerns, coupled with the current economic conditions (the economic impacts of COVID-19, which can lower asset values, and historically low interest rates), may make this a good time to consider certain estate planning options that are available now in the remaining days of 2020 but may not be available in the future.
Some of those options include:
- (A) Using federal estate, gift, and GST exemptions in 2020 before such exemption may be reduced in 2021. Strategies such as lifetime gifting, forgiving existing intrafamily loans, spousal lifetime access trusts (SLATs), and qualified personal residence trusts (QPRTs) are some of the ways that such exemptions may be used during lifetime.
- (B) Implementing strategies that are particularly effective in a low interest rate situation while such strategies are available. Strategies such as intrafamily loans, GRATs, and Charitable Lead Trusts (CLTs) offer such options in this climate.
- (C) Transfers of minority interests held in entities in 2020. Presumably, the valuation of such transfers would include consideration of valuation discounts for lack of control and marketability.
- (D) The creation and funding of a dynasty trust that can last for the perpetuities period (the maximum term for a trust's existence), will provide creditor protection and will avoid estate tax for a number of generations.
While we do not have a crystal ball that would provide insight into the future or the results of the election, change will occur sooner or later. Our goal here is simply to provide you information regarding opportunities to empower you to consider options to address such change.
If you would like to discuss the topics covered here or your estate plan in general, please do not hesitate to contact your estate planning team at Davis Wright Tremaine.