The Democratic sweep of the White House and both chambers of Congress has put many wealthy Americans in a difficult position: A major tax increase may be coming, and it may be too late to take action to avoid a huge estate tax bill, among other things.
Joe Biden, who was declared president-elect by Congress, has campaigned on a variety of tax rate hikes and other reforms aimed at squeezing trillions of dollars from corporations and wealthy Americans earning more than $400,000 a year, Bloomberg reports. The Democratic victories in Georgia’s two Senate races this week will give the party a slim majority in both houses of Congress and the ability to implement some of its previous plans.
They’re going to pass a fair number of Biden proposals, particularly those that would adversely affect wealthy Americans,” said Edward Renn, a partner at Withers, LLP. There will be more changes than people expected two months ago.”
The question that has the wealthy and their advisers at a loss is which proposals will be passed and when they will be implemented. Biden and Congress could begin implementing the tax increase as early as 2021 or delay implementation until 2022 or 2023. The threat of retroactive laws means that wealthy families and investors don’t know which rules apply to transactions currently taking place.
“We can’t tell people to plan as if the current law is going to remain as it is,” said Brad Dillon, senior wealth strategist at UBS Group AG. “Until we get the necessary assurances that tax reform won’t have retroactive effect, it’s a massive wait-and-see game right now.”
For example, if the wealthy sell their stocks now, they won’t know for sure whether to tax profits at the current top rate (23.8 percent) or at the higher income tax rate that would apply to capital gains, as Biden has proposed.
Most advisers believe that retroactive tax reform measures are unlikely to be implemented. But many forecasters also say the Democrats have captured two of Georgia’s seats in the Senate, and it now has a monopoly. And the cost of wrong predictions could be high.
Many of my colleagues and clients are counting on next year to be the effective date for tax increase reform,” said Alison Hutchinson, managing director at Brown Brothers Harriman. While that may be true, there are no guarantees.”
She said, “I think the epidemic relief and any economic stimulus package will be Biden’s top priority, but the money to implement them will need to be obtained from somewhere.”
After President Trump took office, Republicans passed a law in 2017 that doubled the amount of tax exemptions people can give to their heirs’ estates. In 2021, individual estates could be tax-free up to $11.7 million, and couples’ estates could be tax-free up to $23.4 million. However, Democrats did not vote for the bill at the time, and Biden vowed to repeal it and reduce the amount exempt from estate and gift taxes. Rehn of Withers & Associates said cutting the exemptions would be “an easy goal to achieve. Even if Congress does nothing, those provisions will expire at the end of 2025.
In other words, advisers say, those who haven’t taken full advantage of the gift tax break may be running out of time. If the changes have retroactive effect and don’t happen in 2022 or 2026, giving an estate or gift to future generations now could end up costing them millions of dollars more – under current law, transfers of property in excess of the exemption amount are taxed at the top rate of 40 percent.
Says Lehane, “The effective date of these tax reform measures could be a catch-22 for anyone trying to take action now.”
Many wealth management managers, lawyers and accountants are trying to get their clients to avoid this by taking action before the end of 2020. Many are eager to complete wealth transfers by Dec. 31 due to fears that Democrats will capture two more election results in Georgia, however, others have delayed, or had previously pinned their hopes on the fact that Republicans will remain in control of the Senate and will be able to block any tax increases.
I’m sure my phone will be ringing off the hook in the next few days,” said UBS’s Dillon. And those who have completed their estate transfer plans by the end of 2020 will certainly sleep better.”
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