After an unusual election season, we head into 2021 with President-Elect Joe Biden, a House controlled by the Democratic Party and an undecided Senate. The Republican Party will have to win one of the two Senate seats in the Georgia runoff in January 2021 to keep control of the Senate. If not, then the Democratic Party will have control of the Senate by virtue of Vice President-Elect Kamala Harris's tie-breaking vote.
What does this mean for changes to estate taxes? At least one Democratic Party Senator has stated that he will not vote in favor of ending the filibuster, so many decisions out of the Senate will require 60 votes to pass. On the other hand, the reconciliation process only requires a majority vote, is not subject to a filibuster, and has been used to pass significant tax law changes in the past. However, even if the Senate is divided 50/50 after the January Georgia runoff election, it will only take one Democratic Senator to vote against changes to the tax laws to keep those changes from happening. While this may very well mean that substantial tax law changes are unlikely over the next two years regardless of the outcome of the January Georgia runoff election, reducing the lifetime estate tax exemption and increasing the estate tax rate are somewhat low-hanging fruit compared to other tax law changes, because they impact so few people, all of whom would be considered rich by most. As a result, we have to consider the possibility of changes to estate tax laws and factor that such changes can be made later in the year yet retroactive to the beginning of the year. We also have to keep in mind that even if the laws do not change with this Congress, the Senate may change in 2023, when 20 Republican Party and 13 Democratic Party Senators are up for reelection.
President-Elect Biden has allegedly expressed interest in reducing the lifetime estate tax exemption to $3.5 million per person from the current $11.4 million and increasing the tax rate to 45% from 40%. While the potential changes to the estate tax threshold and tax rate will not impact many people, there are two major points to consider: 1) many people who did not need to worry about estate tax at a threshold of $11.3 million per person now need to start thinking about it at a threshold of $3.5 million, even if they do not need to make drastic changes now; and 2) those with estates that are currently or will soon be greater than $3.5 million need to strongly consider making plans before the end of 2020, in case the estate tax laws change in 2021 and are made retroactive to the beginning of 2021.
One example of an estate tax planning strategy for people who could be subject to estate taxes is to form an irrevocable trust and transfer $11.4 million per person into the trust (or as much as possible depending on your situation) so that those assets will not be subject to estate tax in the future. The irrevocable trust can be designed for maximum flexibility regarding how the money can be used and how the trust can adapt to future changes in the law. A well-designed plan will provide multiple scenarios for the creator of the trust to utilize those assets, directly or indirectly, for the creator's benefit and the benefit of his or her family.
If you would like to talk through your estate planning situation, please do not hesitate to contact me, Richard Pearce, Esq.