Tax Moves to Make Before the Election

Under the TCJA, Trump increased the gift and estate tax exemption from $5MM to $10MM with inflation adjustments, bringing that amount to $11.58MM today. Clients can gift up to this amount without paying a dollar of tax during their lifetime. Anything left over can be used to offset estate taxes at death. Biden has mentioned plans to reduce the gift and estate exemption to a level closer to its "historical norm," which could be $5MM or less. 

"For high net worth investors especially, it makes sense to gift now rather than wait," says Weissbart. "Clients have four months left in 2020 to use that higher exemption," he says. Weissbart notes that gifting assets in 2020 could help in another way as well. "When making a gift, the asset is no longer on the client's books, which provides two additional tax benefits: (1) the client will avoid gift and estate tax on all future appreciation of the gifted asset; and (2) if the recipient is in a lower tax bracket, the annual income earned on the asset will be taxed at a lower rate.

3. The cost basis step-up of bequeathed assets may be eliminated

As it currently stands, heirs can receive appreciated assets with a step-up in basis to the asset's fair market value at the time of death. This means appreciated assets can be transferred at death without a capital gains tax liability. Biden has proposed eliminating the step-up in cost basis at death, which could make death a recognition event for income tax purposes — a change that could result in a big income tax bill at death even if the beneficiaries do not sell the asset. With a Biden presidency, appreciated assets bequeathed to heirs at death could come with a tax liability that might force heirs to sell the asset in order to pay capital gains taxes. 

"The combination of these changes could be a triple blow to clients," says Weissbart. "A Biden administration would not only decrease the gift and estate tax exemption, making more dollars subject to taxes, but also increase the rate of tax on capital gains and possibly eliminate the cost basis step-up for beneficiaries."

Given the possibility of significant tax law changes under a Biden presidency, clients should consider taking advantage of the current tax laws by shifting wealth to younger generations to utilize the record-high gift and estate tax exemption amounts, which could also shift income to beneficiaries in lower tax brackets and potentially defer capital gains taxes for longer periods of time. As with any significant investment decisions, clients should talk to their tax attorney, accountant and estate planner before taking action.