Gifting Window for 2020 May Be Closing
With a Global pandemic and prospects of a sustained recession with double digit unemployment coupled with West Coast wildfires and East Coast hurricanes, I would say that everyone in these United States is looking forward to ringing in the New Year on January 1st. But before the ball drops on a socially distanced crowd in Time Square, you should think about other changes that may occur as we put 2020 in our rear-view mirrors. Specifically the possibility of tax legislation if the party in power shifts in the Executive and Legislative branches of our government.
Proposed Changes
With no political bias intended, it makes sense for everyone to consider what changes to individual and corporate tax policy a Democratic president and a possible Democratic majority in the both chambers of Congress may enact. Bay Area business and real estate attorney Hubert Lenczowski, reminds us that “under a 1984 court case, Congress can enact retroactive tax legislation in an emergency”, thus limiting a individual or corporation the ability to act prior to the effective date.[1] In a Tax Planning Alert letter penned in late August, 2020, he notes that the following proposals have been identified by Vice President Joe Biden as his legislative agenda for tax policy:
- Extend the 12.4% social security tax on earnings over $400,000;
- Restore the 39.6% tax rate on ordinary income over $400,000;
- Cap the tax benefit of itemized deductions to 28% or less;
- Tax capital gains as ordinary income for those with income over $1,000,000;
- Eliminate the deferral of gain on like-kind exchanges of real estate;
- Apply estate taxes to estates exceeding $3,500,000;
- Apply gift taxes to transfers exceeding $1,000,000;
- Repeal the step-up on basis at death; and
- Increase the corporate tax rate to 28%.
Governor Newsom has already fired the first shot for California introducing AB1253 “which, if enacted, would increase the California income tax rate retroactive to January 1, 2020 by another 1% on income over $1,180,000; 3% on income over $2,363,000, and 3.5% on income over $5,900,000.”[2]
A “Use it or Lose it” Opportunity
Before any change to Federal and State tax legislation takes place, we believe that it is time to reconsider the following advantages currently available to those looking to gift ownership in businesses and assets before the clock strikes midnight on January 1st;
- Lifetime Transfers – The current $11,580,000 exemption on lifetime transfers and bequests that allows married couples to make tax- free lifetime gifts up to double that amount, or $23,160,000. Even without a change in the current Republican government, current law stipulates that this exemption is temporary and will reduced to approximately $6,500,000 per person in 2026.[3]
- Depressed Values – While the stock indices are at record levels, most operating businesses have been feeling incredible pain from COVID-19 shutdowns leading to record unemployment and negative GDP growth. The sunshine hiding behind these storm clouds is the opportunity to gift business ownership and other illiquid at significant haircuts to values seen only six months ago.
- IRS Announcements – The “IRS has announced that transfers that take place during our current favorable transfer tax structure will not cause more estate or gift tax in future years as a result of the limits being reduced by tax legislation. In effect, right now we have a ‘use it or lose it’ opportunity to transfer a significant amount of assets under very favorable conditions.”
Tax strategies take time to develop and execute. It makes sense now to talk to your estate planning specialists to determine if these opportunities will work for you and your family. Putting in place a coordinated gifting plan now has the potential to save you and your estate millions of dollars in taxes and transfer more ownership to the next generation under the current temporary exemptions without any gift tax. While you are at it, it’s probably a good time to lock down your health care directive and power of attorney so that it mirrors your current wishes. Regardless of the above tax considerations that you can control, this pandemic has reminded us of risks beyond our control. It’s a tough conversation to have with family but it is one that they will see as a blessing when tough health and financial decisions need to be made.
Exit Strategies values control and minority ownership interests of private businesses for tax, financial reporting and strategic purposes. If you’d like help in this regard or have any related questions, you can reach Joe Orlando, ASA at 503-925-5510 or jorlando@exitstrategiesgroup.com.
[2] Ibid.
[3] Ibid.
