Americans’ Golden Age for Wealth Transfer May Close Soon
by Arina Smith Real Estate 21 October 2020
According to Bloomberg, the 2017 Republican tax overhaul makes this window an ideal time to avoid the 40% levy on the most massive fortunes levied by the US estate and gift tax. However, with the elections heating up, Democrat candidate Joe Biden has a lot to say about the rich getting richer. Large estate holders would be well warned to look at protecting wealth through family transfer as soon as possible.
Elections May Prove a Tipping Point
With all Americans looking on at the election battle between Joe Biden and incumbent Donald Trump, more than a few wealthy Americans should be doing so with trepidation. Wealth Spire mentions that Biden’s tax plans include removing the Section 1031 like-kind exchanges, a method that many Americans have used to retain the value of their appreciated assets without paying capital gains tax. While this is a massive change, it’s not the only thing that the Democrats propose to do if they get into office. It’s likely the tax breaks that the wealthy currently have under Trump may disintegrate, although it’s unlikely that they will disappear overnight.
No Real Plan Yet
Political commentators have noted that while there is a lot of talk about what a Democrat-led senate intends to do if it gets into power, there’s a massive lack of specifics. Among the tax plans that a Biden-led administration would enact include:
- Biden’s tax scheme intends to raise taxes on income over $400,000 applied to individual earnings, payroll taxes, and capital gains tax.
- Over the next ten years, the plan intends to raise revenue by $3.05 trillion
- The tax plan will have a negative impact on GDP, potentially reducing it by 1.47% over the course of ten years.
As is immediately clear, the tax reforms are likely to hit the most wealthy individuals, along with anything they intend to pass on to their children.
Planning And Legislation Both take Time
If the proposed changes to the tax regime were to take effect, they might become active in 2021 or 2022, leaving the rest of this year for wealthy Americans to start planning their wealth transfer strategies. It is important to note, however, that estate planning takes time as well. With so many wealthy Americans wanting to protect their wealth and transfer it down to their children before it becomes the subject of taxation, estate planning agencies may be in high demand. With such a definite deadline date ahead of them, many wealthy families may not have the time to schedule their estate planning services before the taxes start clamping down again.
Finding a Balance
Many older individuals may not want to transfer all of their wealth to their children or grandchildren for fear of squandering. However, the time they have remaining is running out. Estate planning has always been a sore point for many Americans because it forces them to face the uncomfortable finality of their own mortality. Low-interest rates may give wealthy Americans some hope, though. Instead of outright transferring the assets, they may be able to loan their children or grandchildren. Additionally, with the value of businesses depressed because of the pandemic, some individuals can transfer business assets to their descendants without eating up the entirety of their gift tax exemption.
Estate planning can come in several different forms, and they don’t need to be complicated. In fact, the simplest methods tend to give the best options for individuals who are worried about handing over too much to their descendants. Among the methods that wealthy individuals may use to protect their wealth into the next generation include:
- Living Trusts: A living trust allows you to place assets and money into a trust that will pass on to your descendants. They’re like a will, but usable while you’re still alive. If you’re worried about your mortality, a living trust ensures that you can see what your descendants are doing with your assets and money while you’re still alive. It has the added benefit of helping your descendants avoid probate (and its associated costs).
- Family Limited Partnerships: Just like establishing a standard partnership, you can set up assets and funds for your family and descendants to use in a company. You can then assign members of your family as limited partners in the company. You’d be the general partner, so you still retain control over every one of your assets, but each of the members who have a share in the company will also own the assets held by the business. This option has the added benefit of making your overall estate smaller.
- Qualified Personal Residence Trust: This option pertains to your home. A Qualified Personal Residence Trust (QPRT) holds the ownership of your home. You continue living in the home rent-free while you’re alive. When you die, ownership of the family home passes on to your descendants. In most cases, a QPRT is not necessary since property laws dictate who gets what once you die. If you have multiple residential properties you can assign them to different QPRTs. Using this method eases the transition of ownership to your descendants, but it also ensures that you don’t give up control of the property before you die. From most property owners’ perspectives, this makes it a strictly better option for passing on property to their descendants.
Keeping it Simple
While it’s a great time to consider transferring assets, it’s against your best interests to set up a complicated estate plan. Simple methodologies like loaning the current assets to a trust set up in descendants’ names are good ways to approach transferring assets while still keeping your options open. If the Democrats win, you can write a letter forgiving the debt, and nothing is left owing. Putting things in place is the most important thing to do, but time is running out to get that done.