Smart Tax Planning

Here's how wealthy families will save on estate taxes in the Biden presidency

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Key Points
  • Currently, individuals can transfer up to $11.7 million to heirs without facing the federal estate or gift tax.
  • President-elect Joe Biden could call for reducing this exemption to $3.5 million for estates and $1 million for gifts.
  • Lawmakers will likely be focused on pandemic relief this year, which can buy wealthy families more time for estate planning and asset transfers.
Democratic candidates for Senate Jon Ossoff (L), Raphael Warnock (C) and US President-elect Joe Biden (R) bump elbows on stage during a rally outside Center Parc Stadium in Atlanta, Georgia, on January 4, 2021.
Jim Watson | AFP | Getty Images

Wealthy Americans worried about the prospect of higher estate and gift taxes might have more time to come up with a strategy.

With Jon Ossoff and Raphael Warnock both winning their Senate runoff elections in Georgia, the Democrats now have control — albeit precarious — of the Senate.

That will help President-elect Joe Biden push his legislative agenda, and higher taxes are expected to be a major part of his plans

The estate tax could be a prime target for Democrats.

Biden has repeatedly suggested that wealthy Americans are not paying their "fair share" of taxes. He has indicated that he plans to reduce the tax exemption for estates and gifts and increase the rates at which they are taxed to "historic norms."

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That could mean reducing the amount an individual can transfer free of estate tax to $3.5 million, lowering the lifetime exemption for gifts to $1 million and raising the tax rate on transfers over those amounts to 45%.

Currently, individuals have a unified $11.7 million estate and gift exemption. Transfers exceeding that amount are subject to a top tax rate of 40%.

These generous terms are set to expire at the end of 2025.

"The higher exemption and the lower tax rates will not last forever," said Dustin Stamper, managing director of Grant Thornton's national tax office.

Tax overhauls take a backseat to pandemic relief

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Wealthy families may still have time to revisit their estate plans — and do so under today's friendly terms.

Despite the Democrats' control of the White House and both houses of Congress, Stamper believes the window for estate planning remains open for wealthy Americans.

"I think the exemption and rates will eventually be on the table, but I don't think it's likely this year," he said.

"This administration will be focused on the pandemic and on economic relief and won't be eager to take money out of the economy," Stamper said.

The new administration may also choose to avoid the politically charged estate tax debate this year, given the relatively small revenue it generates, said Alvina Lo, chief wealth strategist for Wilmington Trust.

Households will file about 4,100 federal estate tax returns for people who died in 2020 — only approximately 1,900 of them will be taxable, according to estimates from the Tax Policy Center.

Good business owners are typically control freaks. It's very hard for them to give up control of their businesses to a trust.
Alvina Lo
chief wealth strategist for Wilmington Trust

Those returns could generate roughly $16 billion in estate tax liability for 2020, the center estimated.

"The estate tax is not a big revenue raiser," said Lo at Wilmington Trust. "It's a drop in the bucket in terms of paying for things like the stimulus package."

"Even with a Democratic president, House and Senate, the estate tax may not be at the top of their agenda," she said.

In other words, the window to use the huge exemption to avoid estate taxes may remain open for another year.

"We have two kinds of clients," Lo said. "Some were gung-ho and put strategies in place before year-end, while others were on the fence and may now take action in the first quarter."

Prime time for asset transfers

Klaus Vedfelt | DigitalVision | Getty Images

It is not just the tax policy outlook that's driving estate planning.

"With interest rates at historic lows and many asset values depressed, there are opportunities to pass on those assets to others at a low cost," said Stamper of Grant Thornton.

Two of the most popular vehicles to achieve that goal are grantor retained annuity trusts and charitable lead annuity trusts.

Both types of trusts move assets with high appreciation potential —— typically business assets or securities – into an irrevocable trust.

The grantor retained annuity trust makes payments to the grantor for a specified term. Once the term is up, the assets go to heirs.

This administration will be focused on the pandemic and on economic relief and won't be eager to take money out of the economy.
Dustin Stamper
managing director of Grant Thornton's national tax office

Meanwhile, the charitable lead annuity trust pays a stream of income to a charity for a stated period before the remaining assets pass to a beneficiary.

"The objective is to freeze the value of the estate assets for tax purposes," Stamper said. "The potential future appreciation of those assets can then be passed on to beneficiaries tax-free."

Wealthy families weighing these strategies need to consider a trade-off: While they're saving on taxes, they're also relinquishing control of the assets.

"Good business owners are typically control freaks," Lo said. "It's very hard for them to give up control of their businesses to a trust."

As powerful as these estate-planning strategies can be in terms of tax savings, they are not for everyone.

These tactics may make the most sense for people with estates that exceed $25 million, said Stamper.

Even if the exemption is cut in half during President-elect Biden's term, a married couple will still be able to pass on nearly $12 million to their heirs tax-free.

"If you're not going to be taxed, some of these transfers can hurt you," Stamper said.