With every new Presidential administration comes new policy priorities, few more anticipated (for good or ill) than tax policy.  Major tax legislation passed in the last administration doubled the exclusion from federal estate tax from $5 million adjusted for inflation ($5.49 million per individual in 2017) to $10 million adjusted for inflation ($11.7 million per individual in 2021).  With the rule allowing portability of exemption between spouses and a step-up in cost basis for appreciated assets at death, current transfer tax law potentially allows up to $23.4 million in assets to pass from a married couple free from estate or capital gains tax.  The change in executive branch control and the slimmest of Democratic majorities in Congress portends possible changes to transfer taxes.

As of this writing, the Biden administration has not proposed a reduction in the exclusion from federal estate tax, though one is broadly expected by tax professionals and taxpayers.  In conjunction with the America Families Plan, the administration has proposed changes to the capital gains tax, adding higher marginal rates of tax levied on higher earners and applying the top marginal rate of tax on ordinary income to capital gains over $1 million.  In addition, the plan proposes disallowing the step-up in basis at death for some wealthier taxpayers.  These proposals have already received significant pushback from Republicans in Congress and some Democrats in the Senate.

Whether any or all of the proposals come to fruition is unknowable, but it seems reasonable to anticipate some higher rates on capital gains and, perhaps more speculatively a reduction in exclusion.  Taxpayers and advisors are now considering the prudence of gifts and other transfers in advance of any such changes.  Many permutations of possible transfers exist but each should necessarily require a desire on the part of the donor client to irrevocably part with assets, that is, to make gifts that they are comfortable making apart from tax considerations.

Clients who are independently inclined to make irrevocable transfers to children or more remote descendants should consider establishing trusts with broad flexibility to adapt to changes in future income tax rates and transfer tax structures.  Trusts that permit access to beneficial interests by a donor’s spouse (referred to as Spousal Limited Access Trusts, or SLATs) should be considered as well as perpetual trusts that allow distributions to multiple generations.  Certain assets such as closely held interests in businesses such as dealerships may require specific treatment to preserve tax attributes (such as S corporation status) or adhere to external requirements (such as manufacturer or regulatory requirements as to ownership and control).

Clients interested in pursuing tax minimization opportunities should consult with their professional advisors, including members of the McNees Auto Dealer Practice Group.