The Politics of Election-Year Financial Planning

The competing candidates for president are polar opposites in terms of taxes, adding a new urgency to year-end tax planning. Just what are they proposing?

Planning for the next presidential administration is driving the financial advisory industry to hyperbolic extremes right now. Most discussions center on the impact of an immediate rescission of the 2017 Tax Cuts and Jobs Act (TCJA) effective retroactively on Jan. 1, 2021. While it is true that the Biden campaign platform clearly includes rolling back much of the TCJA, Joe Biden also promises not to raise income taxes on the middle class. These competing promises support a more nuanced tax bill than a complete rescission, which has little support among key Democratic congressional members anyway.

My purpose here is to outline the competing campaign promises in this very close presidential race and proffer a thesis that your urgency for end-of-year tax planning (before it is too late) must balance the currently inconsistent recoveries affecting Wall Street and Main Street, the actual proposals of the two candidates, your feelings on the likely outcome of the election and the likelihood of any actual legislation passing.

In my review of the campaign sites and international reporting on each campaign’s promises, I compiled this list of actual proposals in their order of economic impact (the current stimulus bill negotiation and similar pandemic-related stimulus promises are excluded).

The candidates’ proposals

President Trump has no proposed tax plan — his entire tax plan was realized when he passed the 2017 Tax Cut and Jobs Act.  However, beyond that the Trump campaign currently proposes to:

The Biden campaign currently proposes to:

Before you panic, examine the realities

The future of estate taxes

Obviously, some of these positions will affect securities markets and the U.S. economy more directly than others. But all of them would have some effect. You will note that Biden’s current campaign platform does not include rolling back the TCJA’s $10 million lifetime estate tax exemption, plus annual increases. Today, those increases bring it to $11.58 million, and on Jan. 1, 2021, it will be $11.7 million. This exemption is set to expire on Dec. 31, 2025, when the TCJA sunsets. The next president only serves until Jan. 20, 2025, so, absent a new tax law, it is not this presidential election but the next one that may well determine the applicable estate tax exemption.

And even if Joe Biden is elected president and the House agrees to take up legislation to increase the top rates for high earners and corporations, eliminate the step-up in basis at death, change income tax deferral for qualified retirement plans and roll back the lifetime estate tax exemption to the pre-2018 exemption, what chance does it have of actually passing Congress — and when might those items be effective?

The future of the Affordable Care Act

 What chance might Democrats have of actually passing a comprehensive health care package that includes federal funds for battling the coronavirus, expanding the ACA to insure 97% of Americans or implementing an aggressive stimulus package of small-business loans, a higher minimum wage, student loan forgiveness and more stimulus checks?

The Supreme Court may soon adopt arguments that the ACA is unconstitutional and repeal it.  Will either president-elect be able to steward a major health care package and a major stimulus package through Congress? The next administration is already facing major disruptions. Half the states still have unemployment rates ranging from 7.4% to 13.2%, many states still have hundreds of shuttered or underperforming businesses, and other states are enduring failing state pension funds, educational and commercial volatility from pandemic-related closures, and health and welfare restrictions depressing economic activity.

The elimination of the ACA may soon torpedo individual and employer plans, prescription drug coverages and Medicaid and Medicare expansion programs. Health insurance plans will no longer have to provide unlimited lifetime coverage, dependent coverage until age 26 or coverage of pre-existing conditions, or may only include such coverages at much higher premiums. Would all this be enough to spark a new recession?

Tax planning in an uncertain climate

There are other outcomes to consider in this election, regardless of which president serves. Which party will control the House and Senate? Would Congress have enough votes to pass legislation the president would sign? Even some Democrats will balk at much of Biden’s tax plan. Will Biden really focus on tax reform when he will get so much more support for major reforms to the pandemic response, to federal supports for joblessness and small businesses, to immigration reform, and to health care coverage?

The key to tax planning this year is to determine the likelihood of each possible outcome relative to the risk of taking some action, or not, based on that likelihood. The best planning includes elements of flexibility where possible, proper balancing of your competing interests and some structure for ameliorating the risk of unintended consequences.

Time to start gifting? Estate planning moves some wealthy people are making now

Many advisers are suggesting that clients make large-scale gifts to family that use most or all their lifetime estate tax exemption, because they believe that a Biden administration may reduce that exemption retroactively to Jan. 1, 2021. But they must consider that those gifts will not obtain a step-up in basis from the transfer or at the client’s death. Recent legislation and tax regulations have assured taxpayers that a lifetime gift today will be respected even if the TCJA expires and the exemption available at death is lower than the total of all lifetime gifts made before its expiration.  This does lend credibility to making large irrevocable gifts.

Some advisers are comparing Biden’s proposed 39.6% top income tax rate on capital gains over $1 million to the 40% estate tax rate. They are advising very wealthy clients to take certain built-in gains this year by selling highly appreciated assets to a trust or directly to their children while they are subject to the 20% capital gains rate and will obtain a stepped-up basis. The purchase can be funded by a long-term amortized note to the seller at the very low federal rate.

The interest should be deductible to the purchaser and taxable income to the client, but only the remaining note balance will be subject to estate tax at death. Assuming other assets have been gifted to use up the lifetime exemption, this transaction may eventually result in 19.6 percentage point lower tax on the recognition of the gains when sold to offset the 40% estate tax due at death on the remaining note balance. There also will be no estate tax on those assets at death, including any appreciation, and the note’s annual taxable interest should be lower than the annual taxable yield on the original assets.

But what if Biden’s proposed tax changes fail to become law? You will have accelerated capital gains recognition on a bad bet.

My point is that some people should investigate making large wealth transfers by gift or sale.  However, you must strongly consider the possible outcomes so that you do not implement the wrong planning with the wrong assets at the wrong time. Lastly, you may want to wait until December to pull that trigger, as the election results might not be final until well after Thanksgiving.

Senior Vice President, Argent Trust Company

Timothy Barrett is a senior vice president and trust counsel with Argent Trust Company. Timothy is a graduate of the Louis D. Brandeis School of Law, 2016 Bingham Fellow, a board member of the Metro Louisville Estate Planning Council, and is a member of the Louisville, Kentucky and Indiana Bar Associations, and the University of Kentucky Estate Planning Institute Program Planning Committee.

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