The Impact of the Georgia Senate Elections on Estate Planning

With the results of the two Georgia U.S. Senate runoff elections giving the Democratic Party a tiebreaking majority in the upper chamber, along with the Presidency and House of Representatives, the likelihood of additional tax legislation in the next two years is increased. Normally bills in the Senate are subject to filibuster unless three-fifths of Senators are in favor to invoke cloture and end debate. However, one exception to this Senatorial procedure is through reconciliation, a process for budgetary legislation that prevents filibusters and can pass on a simple majority. Thus, there is a path for tax legislation to pass with potentially no bi-partisan support. It’s worth mentioning that passing tax legislation through reconciliation would be subject to the “Byrd Rule” which prohibits the bill from increasing the federal deficit after a ten-year period or making changes to Social Security. Nevertheless, significant tax law changes can and have been enacted through reconciliation (most recently the Tax Cuts & Jobs Act of 2017).Currently, the unified federal estate and gift tax lifetime exemption is at a historically high $11.58 million (2020). However, if nothing is done in Congress, the current exemption amounts will sunset on December 31, 2025, and beginning on January 1, 2026, the exemption will be reduced to $5 million adjusted for inflation. Thus, there is a current window to transfer almost $12 million of wealth for a married couple without incurring estate or gift tax that will close at the end of 2025. The IRS has issued final regulations under IR-2019-189 that there will be no “clawback” for gifts made under the increased estate and gift tax lifetime exemption. This means that the IRS will not retroactively assess gift tax to any lifetime gifts in excess of the sunset exemption amount. Therefore, this offers a unique time for taxpayers to maximize the value of the current lifetime exemption before it is reduced, and the opportunity is lost. Under the current law, if no action is taken by the end of 2025, it may cost your family an estimated $4.6 million in additional estate taxes and reduce the amount of wealth transferred. More importantly, with the Democratic party obtaining 50 seats in the Senate, there is an increased likelihood that this reduction in the estate and gift tax exemption may be accelerated and the window to take advantage of this opportunity shortened. As a result, it may be prudent to assess your current estate plan to see if action should be taken now to accelerate gifting or asset transfers at minimal tax cost.

Legislative Proposals

Since the election of President Biden, Elliott Davis has been closely monitoring his legislative proposals for estate and gift tax:

• Elimination of basis step-ups for inherited assets: Currently, when a decedent passes away, assets in their estate typically receive a basis step-up to fair market value when inherited by a beneficiary. Instead of the beneficiary’s cost basis being the same as the decedent, it becomes the fair market value at the date of death or alternate valuation date. In Biden’s plan, the step-up would be eliminated, and the beneficiary would either assume the decedent’s cost basis in the asset or the unrealized appreciation could be taxable at the decedent’s death.
• Reduction of lifetime exemption: President Biden has proposed for the estate and gift tax lifetime exemptions to return to year 2009 levels which are $3.5 million estate and $1 million gift with an increased maximum tax rate of 45%. This proposal would be even more aggressive than the above-mentioned sun setting.

While not currently in President Biden’s legislative proposals, other administrations sought to curb or eliminate valuation discounts on transfers of interest of closely held businesses, real estate, and other assets. Valuation discounts such as minority interest, lack of marketability, blockage, and built-in gains can significantly reduce the fair market value of transferred assets and lessen the impact to the lifetime exemption and estate and gift tax.How Much Could The Potential Estate & Gift Tax Changes Affect You? An Illustration:Case 1 $30 Million Estate, No Portability [1]Case 2 $8 Million Estate, No PortabilityAs illustrated in the links above, significant estate and gift tax savings can be achieved by being proactive. Through our comprehensive estate planning with strategies tailored to you, even more savings can potentially be realized and maximize the wealth shepherded to beneficiaries.

We can help

Contact one of our Family Wealth Services advisors to see how we can help you with your estate plan.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.

[1] Portability refers to the ability of the surviving spouse to utilize the unused estate tax exemption of the deceased spouse