How the Georgia Senate race can impact your tax-planning
As we approach the end to one of the most tumultuous years in history, many may be wondering what effects the outcome of the recent election will have with regard to their income tax planning and estate planning. This election was especially critical since the two parties economic platforms are widely apart, and changes could affect income taxation and estate tax exemptions expiring on Dec. 31, 2025.
Irrespective of where your political sympathies lie, it is generally accepted that if the Republican Party maintains control of the Senate, the status quo regarding income, gift and estate tax planning will most likely continue, even under a Democratic administration. If the Democratic Party wins control of the Senate, given its control of the White House and the House of Representatives, it is likely taxes will go up.
There will be a run-off in two Georgia senate races in
January that will decide Senate control. If the Democrats prevail, there are specific tax planning measures that may require immediate attention and should be considered before year end.
For example:
Estate and gift tax planning:
All of the techniques to which we refer are currently in use in the ordinary course of good estate planning. If the Democrats win control of both houses of Congress, these techniques are in danger of being eliminated next year and any such tax legislation could be retroactive to Jan. 1, 2021.
Federal estate and gift tax exemptions:
There are currently exemptions from federal estate, gift and generation-skipping taxes of $11,580,000 per person ($23,160,000 per couple). These amounts are adjusted for inflation until they sunset on Dec. 31, 2025 and revert to $5,000,000 per person. Notwithstanding that it is always advisable to use exemptions sooner rather than later and allow assets to grow outside of a couple’s taxable estates, it is imperative that they consider using their exemptions before the possibility of Democratic control of Congress occurs, when these exemptions could be greatly reduced or termi
nated effective as soon as January 2021.
Discounting techniques In conjunction with the use of exemptions: Gifting and the use of exemptions are enhanced by the use of assets that can qualify for discounts to market value because of such things as minority interests, lack of marketability, etc. Discounting is extremely advantageous, making it possible for gifts of substantially more underlying value to be made. Discounts can run as high as 30%-40% if using interests in closely-held businesses.
Deferred Gifting Tech
niques: Additional discounts can be obtained by various qualified and IRS approved trusts which defer the vesting of the gift. These go by various alphabet soup terminology, such as Grantor Retained Annuity Trusts (“GRATs”), Charitable Lead Annuity Trusts (“CLATs”), Qualified Personal Residence Trusts (“QPRTs”) and Charitable Remainder Trusts (“CRTs”), etc.
Family Investment and business entities:
Under appropriate circumstances, where there are viable business reasons, etc., family investment and business entities can be
formed and interests then transferred at varying discounts depending on the nature of the assets.
Income tax planning: With full Democratic control of Congress the potential is for income taxes, including capital gains taxes, to increase -- whereas if the Republicans maintain control of the Senate, the possibility exists that they might be decreased or at least stay the same. In addition, under Democratic control, it is possible that itemized deductions will be eliminated or severely curtailed and that the “Pease” limitation on itemized deductions for high
income taxpayers might be reinstated.
Income tax brackets: There is still time before year end to take actions regarding income tax planning, which can be implemented before year-end. Consideration should be given to accelerating income into 2020, especially if you are concerned that Congress might increase income tax rates in 2021. If you are strongly of the opinion that the Senate will remain Republican and will be able to prevent any significant changes to income taxes in 2021, con
sideration should be given to deferring income to 2021.
Itemized deductions (other than state and local tax deductions, known as “SALT deductions”): As always, consideration should be given to accelerating itemized deductions (other than SALT deductions) into 2020 if you are in a high income tax bracket. Deferring income taxes into future years is, in general, a solid tax planning move.
Capital gains: It is always good tax planning to consider offsetting capital losses with capital gains before year-end. In addition, if you think the Democrats will control both houses of Congress next year, consideration should be given to realizing additional capital gains in 2020, particularly longterm capital gains; if you feel comfortable that the Republicans will maintain control of the Senate, consideration should be given to deferring any additional capital gains realization beyond normal year-end tax loss harvesting.
State income taxes: In addition to the political uncertainty with which we are all dealing, certain states are suffering disproportionately from severe budget deficits and have very high income tax rates. If not already done, accelerate consideration of changing residence/domicile to states with no income taxes and no estate or inheritance taxes.
While standard year-end tax planning is always wise, given the recent change in administration and imminent Senate run-off races in January, a review of your tax planning measures and strategies is highly recommended to prepare for potential changes that can have substantial implications. We strongly recommend you consult with your CPA and/or your tax planning attorney as soon as possible.
Donald A. Kress is a senior vice president and chairman of the trust administrative committee at Coral Gables Trust Company. the largest independent and privately held trust company headquartered in South Florida. He is the past president of the Estate Planning Council of Greater Miami and is a member of the University of Miami Estate and Gift Planning Advisory Board. 786.497.1212 or dkress@cgtrust.com.
Simon Levin is a member of the board of directors at Coral Gables Trust Company. He also is co-chair of the tax and financial planning practice group for the law firm Sills Cummis& Gross P.C. .He is a member of the New York and New Jersey State Bar Associations. He can be reached at 786.497.1212 or googslevin@gmail.com.