Optimizing Your Estate Plan Now in the Event of a Biden Presidency and a Democratic Congress

by: Matt Schwartz, Esq.

As the 2020 election approaches, a frequent question that I receive as an estate planner is what should I be doing now to maximize what I leave to my family as an inheritance.

One can reasonably assume that if Trump is reelected or the Senate remains Republican that there will unlikely be any sizable tax increases over the next four years.  However, what if Biden is elected and both the House and Senate are Democratic?  In that scenario, it is likely that the estate tax exemption returns to $5,000,000 adjusted for inflation per person and that the step-up in basis rules on appreciated assets will be repealed with immediate recognition of capital gain at the time of the taxpayer’s passing.  In addition, the maximum personal income tax rate will rise to 39.6% on income over $400,000 with capital gains being subject to ordinary income tax rates of 39.6% on income (including the capital gain) over $1,000,000.

What can I do now to be safe no matter what happens in the election?

Consider Recognizing Some Capital Gains Now: Over the years many people have ignored sound economic theory regarding diversification of your financial portfolio because of the extremely adverse tax consequences of capital gain recognition when such capital gain could be forgiven at the time of death.  Perhaps this thinking needs to be reevaluated.  With today’s current low income and capital gains tax rates, perhaps it makes sense to recognize $50,000 to $100,000 of unrealized appreciation through a capital gain if the federal income tax is 15% (or 20% depending on your other income).  For some families, it may make sense to recognize significantly more at 20% if you are looking at a future prospect of having some of this income be recognized at 39.6% at the time of death.  The prospect of recognition of the capital gains tax on the transfer of appreciated assets (especially less liquid appreciated assets such as business interests and commercial real estate) when most of the other assets to pay the tax are retirement assets could be draconian.

Consider Second-to-Die Life Insurance: In recent years, I have been less of a fan of second-to-die life insurance based on the high federal estate tax exemption.  However, life insurance (probably ideal to get before 70 if you are a couple) could be a great asset (income tax-free) to cover the tax that will be due on the transfer of appreciated assets at death where the primary assets remaining to pay this tax in many estates could be retirement assets that are subject to income tax upon withdrawal. 

Consider Transferring Some Appreciated Assets to Lower Income Family Members Now: Traditionally, we have recommended transferring appreciated assets to individuals who are in low tax brackets so that they can recognize the gain with little or no tax consequence.  In addition, to continue transferring a modest amount of appreciated assets to lower-income family members to keep their income down on the recognition of the capital gain, you may want to consider transferring more to them if they can recognize it at current favorable 15%-20% rates compared to having to recognize it at the time of your death at a possible 39.6% rate.

Consider Transferring Appreciated Assets to Charity: It is always a good idea to fund a gift with highly appreciated assets as long as the gift is large enough to be deducted as an itemized deduction.  It will make even more sense to transfer highly appreciated assets to charity if Biden becomes President and both houses of Congress are Democratic.

Consider Roth IRA Conversions Particularly if you are currently Married: We are seeing more and more widows and widowers in the 32% bracket or higher so considering Roth IRA conversions while you are still married to maximize the 24% bracket is a good planning strategy.

The first of these four ideas is a relatively new idea for consideration in light of the understanding of many estate planners including myself that the step-up in basis was a permanent part of the tax law.  So, I would wait until after we know the outcome of the election to act too aggressively on recognizing capital gains.  However, all of the other ideas are good tax, retirement, and estate planning ideas to consider now irrespective of the outcome of the election and I would act on those sooner than later if they are a good fit for your situation.

Please do not hesitate to send me an email to matt@paytaxeslater.com or give me a call at (412) 521-2732 if you are interested in having a further discussion on these topics or any other retirement and estate planning topics.