Estate & Tax Changes

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Under President Trump, much of the tax reform has favored large multi-national corporations and the top 1% of individual earners in the United States. For example, the Tax Cuts and Jobs Act of 2017 lowered the top corporate income tax rate from 35% to 21% and significantly reduced the Alternative Minimum Tax, a review meant to ensure high income earners pay a proportionate amount of tax after deductions. Under Trump’s presidency, the estate tax exemption was raised from approximately $5.5 million per person in 2017 to $11.6 million per person in 2020. Due to the generous tax exemption, the Tax Policy Center estimates that less than 0.1% of the estimated 2.7 million people who passed in 2020 will be subject to estate taxes.[i]

President-elect Joe Biden campaigned he would initiate tax reform to ensure the wealthiest Americans would pay their fair share in taxes. Based on his tax plan prior to the election, President-elect Biden proposed to raise taxes on individuals with income above $400,000 through individual taxes, capital gains taxes and payroll taxes. Biden promised he would not raise taxes on individuals making less than $400,000 per year. Rather he proposed middle class tax cuts to give working families financial support.[ii] Biden stated he would raise the corporate income tax rate, reduce the estate tax exemption amount to $3.5 million per person, and increase the estate tax rate to 45%.[iii]

President-elect Biden’s plan to reduce the estate tax exclusion would put a lot more people into estate tax territory. This has some high net worth individuals examining if they should gift assets out of their estate now under the old estate tax exclusions with the hope there will be no claw-back provision in the future. However, many believe that if the Senate remains in Republican control (we won’t know for sure until the Georgia run-off in January 2021), Biden’s tax plan will not pass in its current form, as he will need the presumably Republican held Senate to pass his bill. Further, the tax rule is not expected to take affect for the 2021 tax year.

Layered on top of the pending national tax reform, California recently passed Proposition 19 by a slim majority. One highlight of the Proposition is the ability for eligible senior homeowners to transfer their tax assessments anywhere within the state, even to a more expensive home with an upward adjustment. A second highlight is the requirement that inherited homes that are not used as principal residences by the inheritors will be reassessed for property tax at market value when transferred.[iv]

The second change may have far reaching effects. Since 2010, it is estimated that approximately 650,000 Californians inherited homes from relatives and were able to maintain their low property taxes. California is already one of the most expensive states to live in. Real estate leaders note the passage of Prop 19 could affect many blue collar workers and families who bought in previous decades when homes were affordable and have traditionally passed down their largest appreciated asset, their home, to their kids. Under Prop 19, the next generation will be subject to a tax increase, which may lead to a change in demographics if the inheritors decide they cannot afford the cost of maintenance and sell inherited homes.[v]

While it is too early to make any sweeping estate tax changes in preparation for President-elect Biden’s tax reform, many agree one way or another that change is coming in the form of higher taxation. California’s Proposition 19 will go into effect February 16, 2021. If you have a family business or highly appreciated real estate investment assets, you may want to consider accelerating your estate plan through 2020 lifetime gifts. However, examine such decisions in the context of your overall comprehensive financial plan. Ensure you also understand the non-tax considerations including cash-flow, loss of control, family dynamics and other unique risks. Finally, remember that tax law is notoriously unstable, or jokingly, “tax law is written in pencil.” The laws today may change again in the future so avoid making a fear-based decision motivated by opportunity loss. Reach out to your Certified Financial Planner™ or Estate Attorney timely if you feel you may be impacted.






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