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DiMeo Schneider & Associates

Evaluating Year-End Planning Opportunities Amid Tax Reform Uncertainty

Financial Planning November 20, 2020

By Nicholas Breit

Principal, Director of Financial Planning

Nick provides investment consulting services to nonprofit organizations, corporate executives, family trusts and other high net worth investors. He services clients by providing advice and expertise on asset allocation, portfolio …

Benjamin Franklin advised, “Don’t put off until tomorrow what you can do today.” This adage feels particularly applicable to high net worth individuals concerned over potential tax reform under a new presidential administration.

Year-end 2020 represents a unique window to contemplate planning opportunities, as taxpayers face a dilemma: act now in 2020 to lock in potential tax savings or wait until 2021 to see whether President-elect Joe Biden’s tax proposals1 will gain traction in Congress. The risk is future tax reform could potentially be applied retroactively to January 1, which, while rare, is not unprecedented.

The outlook for tax reform legislation in 2021 largely hinges on which party controls the Senate; Republicans currently hold a narrow edge (50-48), with the final two seats – both for Georgia – to be decided in special run-off elections2 on January 5, 2021. Should Republicans win at least one of those Senate seats, Republicans would retain control of the Senate, which would, in turn, greatly reduce the odds of significant near-term tax reform.

For more information on the outlook for future tax reform, please see our recent article, “Tax Reform: On Hold for Now?”

Planning Considerations Tied to Potential Tax Reform

Using the Lifetime Gift Tax Exemption
The Tax Cuts and Jobs Act (TCJA), passed in December 2017, approximately doubled the estate exemption – from $5.49 million per person in 2017 to $11.18 million per person in 2018. The increased exemption amounts, under TCJA, are scheduled to run through 2025, after which the basic exclusion amount (BEA) is set to revert to the 2017 level of $5 million per person, plus inflation adjustments.

The lifetime gifting exemption currently stands at $11.58 million per person (with a top federal estate tax rate of 40 percent), though President-elect Joe Biden has proposed to “return the estate tax to 2009 levels” which would imply an exemption of $3.5 million per person (plus inflation adjustments), with a top federal estate tax rate of 45 percent.

Importantly, the Treasury Department and IRS issued final regulations in November 2019 clarifying that taxpayers taking advantage of the increased exemption amounts would not be subject to a clawback, should the exemption amount decrease from current levels.

High net worth individuals should evaluate current assets and assess how much might be needed for their remaining lifetime, with consideration to gift ‘excess assets’ to loved ones, which would reduce the size of an otherwise taxable estate. Depending on the size of an outright gift, estate planning which incorporates making gifts to trusts may be advisable to provide parameters/ safeguards for the intended beneficiaries.

Individuals who are likely to one day have a taxable estate should also consider direct payments (to the educational/medical provider) for tuition and medical expenses, which do not constitute gifts, as well as annual exclusion gifts ($15,000 for 2020 and 2021). Such gifts can be an effective strategy for further reducing the size of a taxable estate.

Keep in mind that any gifts in excess of the annual gift tax exclusion ($15,000 to each donee) should be properly recorded on a gift tax return.

Click here to continue reading Evaluating Year-End Planning Opportunities Amid Tax Reform Uncertainty

1 The Tax Foundation, “Details and Analysis of President-elect Joe Biden’s Tax Plan” (October 22, 2020)
2FiveThirtyEight.com, “Georgia’s Runoffs Will Determine Control Of The Senate. Here’s What We Know So Far.” (November 11, 2020)

This report is intended for the exclusive use of clients or prospective clients of DiMeo Schneider & Associates, L.L.C. The information contained herein is intended for the recipient, is confidential and may not be disseminated or distributed to any other person without the prior approval of DiMeo Schneider. Any dissemination or distribution is strictly prohibited. Information has been obtained from a variety of sources believed to be reliable though not independently verified. Any forecasts represent future expectations and actual returns, volatilities and correlations will differ from forecasts. This report does not represent a specific investment recommendation. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. Past performance does not indicate future performance and there is a possibility of a loss.

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