Advisors are urging Affluent families to utilize the TCJA estate tax rules to protect their wealth from a possible Biden win
According to a recent Bloomberg article by Ben Steverman, many advisors are telling rich families to act now and transfer wealth to the next generation by taking advantage of the current generous TCJA estate tax rules or risk losing millions later if Biden becomes President. A CNBC reporter Robert Frank also published an article titled “Here’s why rich kids could get hundreds of billions from their parents if Biden wins” about the same discussion that is happening with wealth advisors and estate planning attorneys.
This is being advised as precaution if the Democrats were to win the White House and the Senate in the November election. The former VP Joe Biden has proposed raising taxes substantially higher on the rich, which includes, according to Mr Steverman “making it much harder to avoid a 40% levy on large estates.” If the wealthy families transfer fortunes to their next heirs now, they can take advantage of the generous estate tax rules that were signed into law with the Trump Tax Cuts and Jobs Act. The Republican 2017 tax law changes made substantial changes to the estate and gift tax exemption. By doubling the amount that rich households can pass on tax free, to $11.58 million of assets for individuals and $23.16 million for couples this year. Beginning in 2018, fewer estates will be subject to the 40% tax, and larger estates will likely owe less tax. Some Democrats have complained that savvy wealth management advisors and estate planning lawyers can protect much more from taxes by utilizing complex planning techniques or “loopholes”. There are also variety of trusts — from SLATs to BDITs, GRATs and more — that can help you be proactive in protecting your wealth. The CNBC article stated that a couple leaving $20 million to their kids would currently pay no estate tax, since up to $23.2 million is exempt. If Biden gets his tax plan, the same couple would pay $5.9 million in taxes on a $20 million gift.
Jere Doyle, an estate planning strategist at BNY Mellon Wealth Management said to Bloomberg, “We’ve been telling people: ‘Use it or lose it,’” and went on to further say “It’s the golden age of estate planning for a lot of people. We may not see anything like it again.” There is a professional snowboarder named Jussi Oksanen that once said “hesitation equals devastation”. Meaning if rich Americans take the wait-and-see approach to what happens with the election and don’t take action before, they might end up losing their chance, according to the bloomberg article. Meaning it takes time to set up trusts, and figure out which assets to transfer, and get businesses & real estate appraised and other valuable possessions like art. And if there ends up being a Democratic sweep, many attorneys and financial planners are expecting to be very busy in the next few months.
Alicia Cole, a wealth manager with Plante Moran, published an article that covers one of Biden’s other revenue proposals. “An additional proposal by the Biden campaign is to eliminate the basis adjustments for appreciated assets upon passing.” Currently, when a taxpayer dies, the assets in his or her estate receive a basis adjustment to fair market value as of the date of death, meaning that heirs may sell assets without realizing a capital gain. Biden proposes eliminating this basis adjustment, which could either mean heirs receive carryover basis and may have to plan around low-basis assets, or even that the estate will realize any capital gains on the decedent’s passing, making the capital gains tax due immediately.
It’s a perfect time
With the plunging interest rates and volatile equity markets have been creating a once-in-a-lifetime chance that’s keeping wealth advisers busy even as they work from home. Another Bloomberg article that was published in May by the same reporter pointed out that key interest rates set by the U.S. Treasury and Internal Revenue Service for estate-planning purposes are at all time lows. At the same time, equities and other investment holdings are experiencing a decline from record-high values. This combination of market volatility and low interest rates create an opportunity for high-net-worth individuals. It may be a good time to consider strategies to manage the tax impact on your estate and family business transitions.
(Image Credit: Bloomberg News)
For example, the so-called Section 7520 rate, determined each month based on a formula, fell to 0.8% in May from 1.2% in April. It had been well above 2% for most of last year. The previous low for the rate, which applies to many popular trust strategies, was 1% in January 2013.
The simplest way for the rich to take advantage of the low rates is to loan cash or other assets to family members with intrafamily loans , Charitable Lead Trusts (CLTs) and Grantor-retained annuity trusts (GRATs). Heirs can borrow millions of dollars, then invest the money and profit from any upside. which lets beneficiaries profit from any future investment gains — with no risk of losing money — as long as those returns are higher than the IRS-required interest rate. The lower the rates, the easier for heirs to make money.
Beneficiaries can lock in today’s ultra-low rates for years or even decades. The IRS-required rate on “mid-term” loans of 3 to 9 years is 0.58% in May. The rate on longer-term loans — which can last 20 years or more — is 1.15%.
Marshall Rowe, president of business owner services at the Colony Group told Bloomberg, “It’s a great time to transfer assets between generations,” he added that “the combination of lower valuations and potential future tax increases is driving a lot of planning activity.” While some advisors warn about getting into unnecessary complicated estate planning, meaning some attorneys have built-in financial incentive to make things more complex than they need to be. The final take away strategy from wealth planning advisors is a person can loan the current exemption amount to a trust benefiting their heirs, or directly to their children, Then, if Biden wins in November with a wide Democratic majority, they can simply write a letter forgiving the debt. The attorney Mr. Renn said “there might not be much time to do much else,” and further explained that what they are trying to do for their clients is to make sure they have a lifeboat in place.
Even families whose estates won’t be subject to the estate tax currently may find themselves with taxable estates in the next year or two and should revisit their estate plans to ensure they still function as intended within the parameters of any new tax legislation. Huckabee CPA offers trust and income tax preparation services in San Diego. Contact Huckabee CPA if have any questions or would like a free consultation.