Possible Year End Estate Planning Opportunity / Conundrum

As you may be aware, the estate/gift tax exemption amount for the year 2020 is $11,580,000. This amount is double the base exemption amount of $5,790,000 and is courtesy of the 2017 Tax Act, sometimes referred to as the “Trump Tax Act.” For a married couple, this means their combined transfer tax exemption amount is currently $23,160,000, less of course any taxable gifts that have previously been made.

This doubling of the transfer tax exemption amount is scheduled to expire on December 31, 2025.

However, during the Presidential election campaign, the Biden/Harris ticket indicated that one of their top priorities will be to repeal the Trump Tax Act as soon as possible, including its doubling of the estate/gift tax exemption amount. The Biden campaign also indicated that the estate/gift tax exemption amounts should be further reduced by returning them to 2009 levels, which would result in an estate tax exemption of $3,500,000 and a gift tax exemption of only $1,000,000. For any of this to occur, the Democratic Party will also have to gain control of the Senate and retain control of the House. While it is clear that the Democratic party has retained control of the House, it is unclear who will control the Senate at this point, as there will be two runoff elections in Georgia in January, 2021 that will determine this.

From a planning perspective, the timing of these two special elections creates quite a conundrum, as they will not occur until 2021. If it turns out that the Republicans win at least one of those runoff elections, then they will control the Senate and it will be very unlikely that the Trump Tax Act will be repealed. On the other hand, if the Democrats win both runoff elections, then it is quite likely that the Trump Tax Act will be repealed.

While it will take some time for legislation to be approved that would potentially repeal the 2017 Trump Tax Act and cut the exemption amounts at least in half, or possibly take them even lower, there has been substantial speculation that the effective date of any such reduction in the exemption amounts will be January 1, 2021, even if the legislation itself is not passed until much later in the year. This potential retroactive application of any repeal of the Trump Tax Act vividly illustrates the planning conundrum that we are facing between now and the end of the year.

If you are concerned that the Democrats will gain control of the Senate, then there are various planning techniques that could be implemented before the end of this year to “lock in” your ability to utilize the current doubled exemption amount before it is potentially reduced effective January 1, 2021. Please contact David G. Watkins or Daniel V. Hiatt, Jr. if you would like to discuss these potential planning techniques.