This post was authored by Salvatore M. Capizzi, Dunham's Chief Sales & Marketing Officer. If you have questions concerning today's topic, please call us at (858) 964 - 0500. Hold us to higher standards.

NEWS FLASH:

If Vice President Biden wins the election, both income and estate taxes may increase, especially for the wealthy.

NEWS FLASH:

If President Trump wins the election, both income and estate taxes may increase, especially for the wealthy.

Now, before you challenge me to a Town Hall meeting where we each separately debate this on two competing television networks, let me explain what I mean.

Estate Taxes

As the situation stands today, even if President Trump is reelected, the estate tax exemption is set to sunset in 2026 from $11.58 or $23.16 million per married couple down to $5 million or $10 million for a couple indexed for inflation.

On Friday, October 16, we learned that the U.S. budget deficit tripled to a record $3.1 trillion in the fiscal year that ended Sept. 30. This is roughly 16.1% of economic output, the largest since 1945.(1) In my view, even if President Trump is reelected, the estate tax issue may be visited as a revenue source sooner and may be brought lower before 2026.

The Democratic Party’s platform on estate taxation is well documented. They are seeking to decrease the estate tax exemption from $11.58 or $23.16 million per married couple down to as low as a possible, likely in the range of $3.5 million or 7 million for a couple. The democratic platform is seeking to increase estate tax on assets that exceed the exception to “historic norms”(2)  It is tough to guess what that may mean but we had top estate tax rates of 60% - 77% from 1934 through 1983 and then primarily 35% to 55% since then with only one extraordinary year at a rate of 0%.(3)

What seems to get less attention is that the proposal also calls for reducing the gift tax exemption - the amount you can gift to your heirs in your lifetime without incurring tax. We could see this decrease from $11.58 million or $23.16 million for a couple to $1 million or $2 million per couple.(2) All of this can happen retroactively as early as January 1, 2021 on transactions that are not completed by year end.

Last November, 2019, the IRS published final regulations that provided guidance needed for taxpayers to make informed tax decisions about lifetime gifts.(4) The anti-claw back regulations clarify that in the event that your client makes lifetime gifts when the increased exclusion amount is in effect and dies when the exclusion amount is lower, the IRS will not claw back the excess from your client’s heirs.

It is widely believed that this holds true whether it results from a Vice President Biden decrease of the exclusion, a President Trump acceleration of the sunset, or the sunset laws as they currently stand.

Income tax

Before you tell me how much worse income tax may be under one candidate or the other, there is little you will be able to do when it comes to federal income tax beyond the tax planning you currently recommend.

I am referring to state and local income taxes - where planning can make a significant difference.

The result of the pandemic and the ensuing shut downs has placed tremendous financial stress on state and local governments. States like New York, New Jersey, Maryland, and California are contemplating higher income tax. Even if certain states do not increase taxes, in many states, these taxes are already high. In California, we pay a maximum 13.3% tax.

Possible Solution to Both Estate, Gift, and State Income Tax

One way of finding tax solutions for your wealthy clients and prospects may be to take a look at establishing an irrevocable Nevada trust.  Nevada has no state income, capital gains, or inheritance tax.

This may be why a completed gift to a Nevada Irrevocable Trust could be a critical recommendation for your wealthy clients and prospects today.

To break this down for your client in simple terms, tell them that the irrevocable nature of the trust simply means that they no longer own the assets they placed in the trust and they cannot change their mind and get rid of the trust at any time in the future.

However, as you will see, they can still receive economic benefit from the assets and even direct the investment of these assets.

A Completed Gift simply means that it is a gift for the $11.58 million exclusion we discussed above or $23.16 million for a couple. As a completed gift, the appreciation of the assets will grow outside of their estate and will not be subject to the current 40% estate tax or potential higher estate tax in the future.

For a carefully written trust, this could mean not only using the gift exclusion before it is reduced, but creating significant and meaningful estate tax saving for your client’s or prospect’s heirs.

For income tax purposes, it is a non-grantor trust meaning the trust is its own taxpayer and is completely separate from your client.

While each state has its own laws and local advisors need to be consulted, the “non grantor” nature of the trust could mean that income on certain assets could escape the state income tax. This is a particularly strong benefit in high state income tax states.

One reason that a client or a prospect may hesitate implementing any irrevocable trust is the fear that their future situation may change and they may need the benefit of the assets placed in the irrevocable trust.

A properly crafted irrevocable non-grantor trust that holds a completed gift can provide benefits to the client. Further, this trust can own an LLC that the client can manage much like they did before creating the trust. For example, they might still oversee the management of an investment account or a real estate asset. This is especially important for clients or prospects where control is important to them.

In addition, it can provide asset protection. Certain contributions can be discounted for gift tax purposes, which could permit more gifts under current gifting limits. Further, the trust in Nevada can last up to 365 years without paying any estate taxes.

Time is ticking between now and the end of the year. I am already seeing attorneys’ workloads increase and I believe you will have a surge of wealthy people looking at this before the end of the year, which may limit the number of attorneys available to help them.

Start these discussions with wealthy individuals now.

Feel free to call me at 858.964.0500 or email me at sal.capizzi@dunham.com to discuss any specific situation you may have or to clarify any of the points made in this blog.

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Sources:

(1)  U.S. Budget Gap Tripled to Record $3.1 Trillion in Fiscal 2020, Treasury Says https://www.wsj.com/articles/u-s-budget-gap-tripled-to-record-3-1-trillion-in-fiscal-year-2020-treasury-says-11602871210

(2)  Why progressives should push to scrap the estate and gift taxhttps://www.accountingtoday.com/opinion/why-progressives-should-push-to-scrap-the-estate-and-gift-tax

(3)  Historical Look at Estate and Gift Tax Rateshttps://taxna.wolterskluwer.com/whole-ball-of-tax-2018/historical-estate-gift-tax

(4)  Estate and Gift Taxes; Difference in the Basic Exclusion Amount https://www.federalregister.gov/documents/2019/11/26/2019-25601/estate-and-gift-taxes-difference-in-the-basic-exclusion-amount

This document is provided for informational purposes only by Dunham & Associates Investment Counsel, Inc. solely in its capacity as a Registered Investment Adviser and should not be construed as legal and/or tax advice. Dunham & Associates Investment Counsel, Inc. does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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