Joe Biden

Wealthy Families, Hoping to Save on Taxes, Are in a Holding Pattern. Here's Why

Jonathan Ernst | Reuters
  • President-elect Joe Biden’s tax plan included an overhaul of federal estate taxes, which would transform the way wealth is transferred to future generations.
  • All eyes are on two Senate races in Georgia, which are heading toward a runoff. Democrats need the White House and both houses of Congress in order to push through big tax law changes.
  • Wealthy families are currently in a holding pattern with respect to dramatic changes to their tax plans. Now is a time for a gut check, especially for households moving millions of dollars.

Wealthy families have Georgia on their minds.

That's because the outcome of two contentious races for the Senate could shape their plans to pass on millions of dollars to their heirs, as well as the strategies they may use to cut their income taxes.

President-elect Joe Biden campaigned on a detailed tax plan that would raise taxes for high-income households.

That plan would also overhaul the way wealthy families pass assets to future generations, subjecting large wealth transfers to steeper taxes.

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Wealthy households, their attorneys and tax professionals had been preparing to shift assets in anticipation of a "blue wave" in Washington that would bring Biden's tax plan to fruition.

While Democrats captured the White House and maintained the House, all eyes are now on two key Senate races in Georgia that are going into runoff in January.

They're between GOP Sen. Kelly Loeffler and Democratic candidate Raphael Warnock, and Sen. David Perdue, R-Ga., and Democrat Jon Ossoff.

Those two contests will determine whether Democrats get a 50-50 split in the Senate — and whether the more aggressive elements of Biden's tax plan take place.

That means high-net-worth taxpayers and their professionals are in a holding pattern until January.

"There's a statistical possibility that the Democratic party will control the House, Senate and White House, which is bad news for wealthy Americans with estate tax problems," said Robert S. Keebler, CPA and partner with Keebler & Associates in Green Bay, Wisconsin.

"Anyone who assures clients that both Georgia Senate seats will go to Republicans runs the risk of doing them a tremendous disservice," he said.

Estate tax overhaul

President-elect Joe Biden addresses media about the Trump Administration’s lawsuit to overturn the Affordable Care Act on Nov. 10, 2020 in Wilmington, Delaware.
Joe Raedle | Getty Images
President-elect Joe Biden addresses media about the Trump Administration’s lawsuit to overturn the Affordable Care Act on Nov. 10, 2020 in Wilmington, Delaware.

There are three major themes to Biden's plans for raising taxes on wealth transfers.

First, he proposed reducing the amount an individual can transfer free of estate and gift taxes — the estate and gift tax exemption — to $3.5 million in bequeaths at death and $1 million in lifetime gifts.

Currently, an individual can transfer up to $11.58 million in assets without being subject to gift and estate taxes. Amounts over this threshold are subject to the estate and gift tax.

Second, he called for boosting the estate and gift tax to 45%, from 40%.

Finally, Biden proposed doing away with a tax maneuver known as the step-up in basis. The "step-up" allows heirs to receive assets valued as of the day of death, which means they would be subject to little tax if they turn around and sell the property.

Under Biden's plan, unrealized capital gains would be subject to tax, according to an analysis from the Tax Policy Center.

The prospect of these changes was enough to jump start wealthy families into making appointments with their attorneys and accountants.

They were hoping to move millions of dollars out of their estates while they could still make the transfers under the current tax code.

While some are willing to shift their money and begin funding trusts or making large gifts, others are standing pat — and depending on the client's situation, that might be okay.

"The advice all along was to prepare but not predict," said Pamela Lucina, chief fiduciary officer and trust and advisory practice leader at Northern Trust in Chicago.

"This is advice that sort of transcends the election," she said. "Part of the reason why people procrastinated is due to the issues they need to tackle: Can they afford to make these gifts? Who are the trustees?"

Another issue that might keep wealthy people on the fence is whether they're truly ready to part ways with the money.

"'Do I want to give up control? I might need those assets later on,'" said Brad Sprong, national tax leader for KPMG Private Enterprise. "There are reasons why people object to a wealth transition."

Revisit goals beyond tax savings

Oliver Rossi

The reality is that the $11.58 million estate and gift tax exemption is due to expire at the end of 2025, along with a swathe of individual tax provisions in the Tax Cuts and Jobs Act.

This means that some wealthy families were already planning on moving large portions of assets out of their estate — but the prospect of a blue wave merely hastened those plans, said Lucina of Northern Trust.

Families that may not be ready to commit wholeheartedly to moving assets are working with their estate planning attorneys and tax professionals to build flexibility into their plans.

For married couples, this might include using only one spouse's estate and gift exemption — that is, shifting only $11.58 million — rather than the full exemption for both spouses, said Sprong of KPMG.

Now is the time for families who were on the fence about moving their money to have a gut check with their tax professional and their attorney.

"We're looking for ways to put the client in the best position should something happen," said Michael D'Addio, principal at Marcum LLP in New Haven, Connecticut.

"We've all learned lessons from 2012," he said, referring to the time wealthy families hurried to move assets in anticipation of the estate and gift exemption falling to $1 million from $5 million.

Back then, the exemption didn't fall, and families made massive gifts for nothing.

"Those people had donor's remorse," D'Addio said.

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