Co-author: James Nevers, CFP ® – Soundmark Wealth Management
Your estate plan and financial plan should be given careful thought before the 2020 elections. The Senate currently is made up of 53 Republicans, 45 Democrats, and 2 independents. There are 35 Senate seats up for election in 2020. The House of Representatives is currently made up of 197 Republicans, 232 Democrats, and 1 independent. All 435 House seats are up for election in 2020. And of course, 2020 is a Presidential election year. The outcome of the elections is uncertain. If there is a party sweep, the current estate tax regime is likely to change. However, it is also possible that the estate tax regime will remain the same after the elections, particularly if there is mixed-party control. Several Democratic candidates have expressed policy goals to increase the estate tax, while Republican candidates have expressed desires to repeal the tax entirely.
The current Federal estate tax applies to estates over $11.58 million ($23.16 million for – married couples). The estate tax applies on a graduated scale, with a highest tax rate of 40%. The exemption amount is currently set to revert back to $5 million (subject to inflation) in 2026. However, depending on the election outcome, changes to the Federal estate tax structure may occur prior to 2026, including changes to the exemption amount and/or maximum rate.
When thinking about how this may impact your financial plan, it is important to remember that your plan is likely based on the current information your financial planner knows… meaning it will change over time as new information becomes available.
Democratic Proposals
Potential Changes to Estate Tax Regime
Democratic candidates, including Bernie Sanders and Elizabeth Warren, are recommending increases to estate tax rates and decreases to the estate tax exemption. Sanders’ proposed tax law, the 99.8 Percent Act, would lower the estate tax exemption amount to $3.5 million per individual and increase estate tax rates to a minimum rate of 39% and a maximum of 77%. Warren’s proposal, the American Housing and Economic Mobility Act of 2018, would also lower the exemption amount to $3.5 million and increase estates tax rates.
In addition to changes to estate tax, Sanders and Warren both proposed a wealth tax, which could create new taxes on households over certain wealth levels. Sander’s proposed wealth tax would impose an annual tax on households with assets over $32 million, while Warren’s proposed wealth tax would impose a tax on households with assets over $50 million.
Potential Changes to Your Financial Plan
Most of the Democratic proposals would make advanced planning strategies, usually reserved for households with $10-$50 million or more in assets, be practical for much smaller households in the $3-$10 million range.
Joe Biden’s plan to tax capital gains at the same rate as earnings of more than $1 million and Bernie Sander’s plan that starts at only $250,000 will make a much stronger case for small business owners to establish defined benefit plans. For recently retired individuals, it may also be appropriate to make increased Roth conversions while income tax rates are still at historically low levels.
Bernie Sander’s estate tax increase would make irrevocable life insurance a viable option for the many households with assets above $3.5 million, again a strategy previously reserved for higher net worth households.
Republican Proposals
Potential Changes to Estate Tax Regime
If a Republican candidate is elected, the estate tax may be eliminated entirely. Republican candidates, including President Donald Trump and others, have proposed to eliminate the estate tax in a proposed bill called The Death Tax Repeal Act of 2019.
Potential Changes to Your Financial Plan
Little is predicted to change from the current tax laws that are in force during Trump’s presidency. If the estate tax is eliminated, it may be a good time to make gifts in excess of the Democratic proposed limits in anticipation of them being reinstated in the future.
As we have seen, tax laws can and do change as Democrats and Republicans take their turns. It is likely that when Democrats regain control of the government that tax rates will increase for high income and high net worth families. It thus may be sound planning to implement estate-tax reduction and income-realizing strategies before today’s current taxpayer friendly environment expires.
Making estate planning and financial planning decisions during these uncertain times is difficult and complex. We recommend reaching out to your financial planner and estate planning attorney to discuss the best strategies for your situation.
James Nevers, CFP® is an Advisor at Soundmark Wealth Management, LLC. James works closely with physicians, business owners, Directors and Executives at Amazon, Microsoft, and Boeing, and other high-net-worth individuals to help them define their financial goals and implement an ongoing financial planning process.