Trying to anticipate changes in the tax codes is like trying to time the stock market—a nearly impossible task. Most tax pundits guessed right, when they said that President Trump was going to cut corporate tax rates in 2017, but the doubling of estate and gift tax exemptions to more than $23 million was a surprise. So was the elimination of deductions for state and local taxes, as reported in The New York Times article “2 Strategies to Consider Ahead of the 2020 Election.”

With a presidential election coming up this fall, the challenge of predicting the impact of changes that may affect taxpayers and their estate planning has already begun. Candidates are talking about big changes, like health insurance, climate change and infrastructure. They are also talking about changes to wealth tax, but what no one has covered yet are changes like lowering exemptions and raising rates for estate and gift taxes and ending the valuation discount for closely held family businesses. This is a tax break that lets families transfer their businesses for far less than they are worth.

This valuation can impact any small business that owners expect to transfer to heirs. The current exemption levels for estate and gift taxes are so high now, that this tax only applies to very few people – less than 1%.  However, if the exemption levels and tax rates change, that could become a problem for business owners.

The estate tax is now in effect until 2025, with exemptions at $11.58 million in 2020 for an individual, and  double that amount for a couple. Everything above that is taxed at a rate of 40%.  The estate tax is a big target. This is because if the exemption were lowered, it would generate a good amount of income, and impact a relatively small group of Americans. The likelihood of this happening will depend on election results, both at the presidential and congressional levels.  The election time is a good time to take advantage of any changes in law that might be coming our way.

Eliminating the valuation discount had been proposed by the Treasury Department and the IRS under President Obama, when these discounts were seen as being overly generous. A few months after taking office, President Trump issued an executive order for the Treasury to withdraw the regulation to eliminate the discount. However, the statute is still on the books.

This is an example of the importance of reviewing estate plans and business plans on a regular basis and having planning that has enough flexibility to withstand change. Speak with your estate planning attorney to ensure that your estate plan is prepared, whatever the results of the 2020 elections may be.

Reference: The New York Times (Feb. 14, 2020) “2 Strategies to Consider Ahead of the 2020 Election”