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SEPTEMBER 30, 2020

Wealth Planning Update: What’s your 2020 tax contingency plan?

Post-election tax planning strategies you may need to consider.

You can only plan so much for the unknown and that’s especially true when it comes to politics. But with the upcoming Presidential and general elections in full swing, the candidates have unveiled their economic proposals that could bring about significant changes. What will these proposals mean to you and what planning strategies are important to keep top of mind so you are ready to take action as needed?

Democratic candidates have been on the record in wanting to raise revenues for their policy priorities, such as expanded healthcare. If the Democrats take both the Presidency and the Senate in November, it seems certain that there will be a push to increase taxes on at least the wealthiest of taxpayers.

If President Trump wins and the Senate remains in Republican hands, its still possible that at least some future tax increases may be necessary to offset the massive COVID-19 related stimulus spending.

Among the great unknowns is whether Congress would attempt to make any tax increases retroactive to January 1, 2021 — thereby potentially limiting the ability to take a wait and see approach and delay implementing any tax reduction planning strategies until there is more clarity on where future tax legislation is likely heading. Although a retroactive tax increase of any magnitude may be unlikely and could face adverse court action, when Congress passed a tax overhaul following the 2012 election to avoid a fall off the fiscal cliff, the details of that new tax law did catch many people off guard without enough lead time to plan and take action.

So, unfortunately, waiting until after the election to start considering certain contingent planning strategies might leave you unprepared and without sufficient time to take the necessary steps to protect your wealth from taxes. But with over a month to go before the election, there’s still ample opportunity to at least evaluate the different proposals, decide how they could impact you and be well prepared to act as the future situation dictates.

We have highlighted below some of the proposed tax law changes in comparison to current law and provided a few potential planning strategies to think about.

Individual income tax and payroll tax

Democratic lawmakers have long been critical of the Tax Cuts and Jobs Act of 2017 (“TCJA”). The TCJA was passed along strict party lines, so a change in both the White House accompanied by Democratic control of both houses of Congress could result in revisions to many of the TCJA provisions. Not surprisingly, Democratic candidate Joe Biden’s tax plan takes direct aim at some of TCJA’s key provisions. According to the nonpartisan Tax Foundation, these proposals would increase taxes on the top 1% of taxpayers by 7.8%.


Estate, gift and generation skipping taxes

The current $11.58 million estate, gift and generation skipping tax exemption amounts are slated to sunset after 2025, but Democrats might push for an earlier expiration date. The exemption amounts could then revert back to the previous $5.49 million level ($5 million indexed for inflation). Some political commentators, however, aren’t ruling out an even more drastic reduction in the exemption amount, perhaps even as low as $3.5 million which was the exemption in 2009.

In addition, the Biden campaign has other proposals that could affect the estate tax, including eliminating the “step-up” in basis for inherited capital assets. Heirs would have to pay capital gains tax on those assets using the “carry-over” cost basis of the deceased.


In 2018, the Internal Revenue Service issued a ruling reassuring taxpayers that it will not “clawback” and tax large gifts if the estate tax exemption ever reverts back to the prior lower threshold. So any current planning undertaken with today’s larger exemption amounts will be upheld should the law change. But bear in mind that if the estate tax exemption ends up being reduced in the future, you won’t be able to make gifts retroactively using current law. So depending upon what the future holds in Washington, this may be a “use it or lose it” situation when it comes to taking advantage of the current exemption amount which is the highest in the history of the estate tax.

For married couples who are considering utilizing the estate tax exemption amount prior to any potential law changes, one strategy to consider is transferring assets to an irrevocable spousal lifetime access trust (“SLAT”). With a SLAT, a spouse can be included as a beneficiary along with other family members and receive distributions without causing estate tax inclusion. With proper structuring, you and your spouse could establish SLATs for the benefit of each other and provide for trust distributions to be made if needed to help support your accustomed manner of living.

Corporate taxes

Democrats have also taken issue with the corporate income tax rate enacted in 2018, which reduced corporate tax rates to 21% down from 35%.

Start considering your planning options now

If tax law changes do come in 2021, it is possible that they will have an immediate effective date and while perhaps unlikely could even be made retroactive to January 1. So by the time any new law passes, it might already be too late to implement any meaningful planning. For example, trusts receiving gifted assets may need to have already been established and funded prior to the passage of any new tax legislation in order to utilize the current high gift tax exemption amount.

To be sure, elections bring uncertainty. But being aware of the proposals being discussed and planning ahead can help you prepare for what comes next. Be sure to review your options and chart your best course of action to get ready. BMO will continue to keep you apprised of proposals and planning implications. We’re here to help.


Stephen White
Stephen White
Managing Director
BMO Private Bank
Steve oversees a team of skilled professionals dedicated to providing high…
Steve oversees a team of skilled professionals dedicated to providing high net worth individuals, families, privately held b…
Steve oversees a team of skilled professionals dedicated to providing high net worth individuals, families, privately held businesses and nonprofit organizations with a full …
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