Use It or Lose It…Maybe: Gift Planning Considerations in an Unpredictable Election Year

In a year rife with a global pandemic, intense social justice movements, tempestuous markets and dogged allegiance to party lines, the 2020 presidential election seems to be as unpredictable as the year itself. Should the Democrats take control of Capitol Hill, it is almost certain that one of the first pieces of Trump administration legislation to face scrutiny will be the Tax Cuts and Jobs Act of 2017 (TCJA).

Among the significant provisions of the TCJA was the doubled gift tax lifetime exemption. This exemption allows taxpayers to make gifts of up to a certain cumulative value throughout their lives and avoid transfer taxes on those gifts. It is well-settled that Democrats favor higher gift taxes and lower exemptions, while Republicans advocate the opposite.

The TCJA perfectly illustrated this paradigm by increasing the gift tax lifetime exemption from approximately $5 million to $10 million. When indexed for inflation in 2020, that amounts to approximately $11.58 million in gifts a person can make without seeing a cent of gift tax. The exemption is per individual, so it is effectively doubled to $23.16 million for married couples. For taxpayers who make gifts exceeding the exemption, the TCJA continues to impose a flat tax rate of 40% on the transfers.

While the TCJA provision is written to sunset on December 31, 2025, a win for the Democrats would likely put the lights out on it much sooner. Presumptive Democratic nominee  former Vice President Joe Biden released his “Unity Task Force Recommendations,” detailing his economic plans as president.. Included within those recommendations is lowering the estate tax exemption back to the historical norm. Under the unified system for estate and gift taxes, Mr. Biden’s recommendation likewise applies to the gift tax exemption.

Although Mr. Biden took a comparatively conservative position against his progressive former opponents regarding estate and gift taxes, the release does not indicate what “historical norm” he intends to revert the exemption back to. Between 1997 and 2001, the exemption ran in the $600,000s. From 2002 to 2010, the gift tax exemption was $1 million. Until the TCJA, the exemption hovered around $5 million. 

In addition to lowering the exemption, it is also possible that Democratic tax reform could be retroactive to a certain extent. Assume such legislation occurs late in 2021. It is a real possibility that the act could be effective January 1, 2021, for example. To this end, many taxpayers who contemplated doing some substantial gifting are accelerating those gifting strategies to 2020.

If you wish to understand gifting options available to you, please do not hesitate to reach out to your Schneider Downs tax advisor.

• https://www.jdsupra.com/legalnews/insight-on-estate-planning-april-may-39849/#:~:text=However%2C%20the%20favorable%20estate%20tax,pre%2D2018%20levels%20after%202025.
• https://joebiden.com/wp-content/uploads/2020/07/UNITY-TASK-FORCE-RECOMMENDATIONS.pdf page 15.
• https://taxfoundation.org/federal-estate-and-gift-tax-rates-exemptions-and-exclusions-1916-2014/; https://www.taxpolicycenter.org/briefing-book/how-do-estate-gift-and-generation-skipping-transfer-taxes-work