How has the 2020 election shaped the political landscape and what does this change mean for your real estate scheme? First, at the top of the list, Joe Biden and Kamala Harris appear to be the new president-elect and vice president-elect, with what appears to be 306 electoral votes for Donald Trump and Mike Pence’s 232 clear electoral votes. The Democrats retained control of the House of Representatives, albeit with a narrower majority.
The Senate is a more complex subject. Republicans control 50 seats and Democrats control 48 seats in the Senate. Both Georgia Senate seats will be on standby in the January 5, 2021 runoff election. There are Republican incumbents in both seats and the Democrats are fighting an uphill battle to defeat them in the runoff. However, if the Democrats win both runoff elections, the Senate will be tied to 50 Republicans and 50 Democrats, and beginning January 20, 2021, Vice President Kamala Harris will be the deciding vote to give the Democrats a majority in the Senate.
With Democrats in control of the presidency, Senate and House of Representatives, they may be able to pass legislation similar to then-candidate Joe Biden’s tax plan. That plan included a reduction in the amount that could pass free of property taxes from the current $11.58 million to $3.5 million. Biden’s plan also called for increased income tax rates and capital gains tax rates, among other changes.
What could this mean to you and your family? If you have assets that could be more than $3.5 million at your death, this could mean that you owe a 40% estate tax on those assets over $3.5 million. You may be able to plan now to take advantage of the current $11.58 million exclusion. (Note, even without congressional action, under current law, the current exclusion will be halved at the end of 2025.)
A potential Democratic-controlled government could change the estate tax exclusion retroactively to January 1, 2021. So, you’ll need to act in 2020 to make sure you avoid a potential reduction in the exclusion. You can do this by making a direct donation to your children or other beneficiaries. However, by donating to a trust, you can protect them and protect assets from creditors and divorced spouses and their mismanagement. If you are married, you can give the assets to an irrevocable trust in favor of your spouse. These funds can be distributed for the benefit of the beneficiaries under the distribution terms you have specified, such as health, education, maintenance and support.
If you think income tax rates will be higher in 2021, you might consider recognizing income in 2020 or deferring deductions until 2021 when they are more valuable.
Consult with your estate planning attorney soon to discuss these possible strategies and how they might be used in your case.
Stephen C. Hartnett, JD, LLM
American Academy of Estate Planning Lawyers, Inc.
9444 Balboa Street, Suite 300
San Diego, CA 92123
Phone: (858) 453-2128