The Politics of Dying

Much is at stake in the upcoming election.  Democratic and Republican politicians seem to disagree on just about everything.  The taxation of gifts and inheritances is one of the areas where the philosophical differences between the two parties is the greatest.

Estate taxes have not been much of an issue of late for the vast majority of investors who reside in the U.S.^[1] because of the steady increases in a tax credit referred to as the “unified credit.”  This credit is applied to the value of assets that are gifted during life or bequeathed at death to calculate the “lifetime exemption amount,” which is the amount that can be transferred tax-free during life or at death.^[2]

The lifetime exemption amount is currently $11.58MM per person, which is $23.16MM for a couple, but the streak of increases in the unified credit (and the corresponding increase in the exemption amount) could end after the election.  The Democratic party has long favored using estate and gift taxes to redistribute wealth.  As a result, it seems likely that if the Democrats end up with control of the White House and both houses of Congress, gift and estate tax will rise.

At the time of this writing, Wall Street’s futures markets has the Democrats favored to win both houses of Congress and the White House.  No one has set odds on the tax changes that will occur if that happens, but some are predicting the amount that can be transferred tax-free will go back to what was in effect during the Obama years: $5 million per person, indexed for inflation.^[3]  However, others are calling for a much greater increase in gift and estate taxes. 

For example, Joe Biden’s tax plan calls for the repeal of the basis-adjustment rules that currently allow the income-tax basis of inherited assets to be stepped up (or down) to their market value on the date of death.^[4]  Senator Bernie Sanders has proposed more dramatic changes.  He is pushing for the exemption amount to be reduced to $3.5 million and for the maximum tax rate on gifts and estates to skyrocket to 77%.

The date on which these tax increases would take effect is far from certain.  It’s possible that they could take effect as soon as January 1, 2021, although some point later in 2021 is more likely. 

In any event, persons who are concerned about how tax increases could affect their families should revisit their estate plans sooner rather than later.  Timing could be critical and so law firms are likely to be hard-pressed to keep up with demand should Democrats have cause to celebrate on election night.

Please note that this article is not intended to support either political party or candidate.  Nor do I intend to discourage those who regard the payment of taxes as a patriotic duty or noble endeavor.  Rather, my intention is to provide a heads-up to those who wish to arrange their affairs to lessen the taxes that they and their heirs are legally obligated to pay.

Thank you for your attention,

Andrew J. Willms
Willms-O'Leary, S.C., Of Counsel
The Milwaukee Company, President and CEO

Gift and Estate Tax Exemption By Year

[1] People who permanently reside in the U.S. are subject to federal gift and estate taxes even if they are not U.S. citizens.

[2] The gift-tax exemption amount was less than the estate-tax exemptions from 2004 until 2011. 

[3] These amounts are doubled for married couples.

[4] The basis adjustment does not apply to inherited assets considered to be “Income In Respect of a Decedent” (such as retirement accounts and annuities).