By Kit Driscoll
Major tax reform discussions are ongoing in Washington and Sacramento while everyone at home is busy navigating the pandemic. Many commentators are predicting that budgetary pressures resulting from the COVID-19 stimulus measures will necessitate a near-term reversal of some of the 2017 federal tax cuts and provide further rationale for the passage of significant California property tax propositions. We encourage you to revisit your estate plan and consider gifting strategies in light of the potential legislative changes and unprecedented economic environment as highlighted below.
In 2020, the lifetime exemption allows individuals to transfer up to $11.58 million free of estate and gift tax and generation-skipping transfer (“GST”) tax either by gift during life or upon death. Transfers in excess of those exemption amounts, other than to charity or to or for the benefit of a spouse, are taxed at a 40% rate. Biden and Sanders published 110 pages of policy reforms that would restore the estate tax regime to the “historical norm.” Many commentators are speculating this proposal means reducing the estate and gift tax and GST tax exemptions from $11.58 million per person to $3.5 million per person. However, “historical norm” could also mean even lower exemption amounts and a higher tax rate. If not sooner amended, the estate and gift tax and GST tax exemptions are slated to revert to pre-2017 levels effective January 1, 2026, absent Congressional action.
The IRS issued guidance confirming that transfers taking advantage of the current exemption amounts will not be “clawed back” by a change to the law, making 2020 the time to utilize the balance of your exemptions by making gifts before any legislation becomes effective.
Propositions 15 and 19 will be on California’s November 2020 ballot and, if passed, could significantly change the property tax landscape.
The current low interest rate environment makes certain wealth transfer vehicles especially attractive. Three of these techniques are briefly described below.
It is unknown what future income tax rates will be, but income tax rates for high-earners may be increased through Biden’s proposal to reverse the 2017 tax cuts or other California and federal proposals to increase tax revenue after the COVID-19 stimulus. Federal and state taxes are owed on the conversion; however, future distributions from the Roth account are then income tax-free. Contact your financial advisor to discuss whether a Roth conversion or partial conversion is advantageous.
California’s high state income tax rates are encouraging residents to move out of state, but another option may be to transfer legacy assets to a trust in a favorable tax state. Legacy assets that are expected to be held for future generations and not used for current expenses or distributions might be held in a trust outside of California and accumulate and grow free of state income taxes. We are happy to discuss the optimal structure for legacy assets and advantages of different states with you in more detail.
For more information or to discuss your estate planning and gifting strategies, please contact Coblentz Family Wealth attorneys.
 Earlier in his campaign, Biden proposed eliminating the step-up in basis at death so that beneficiaries would have income tax due on the sale of estate assets.