How wealthy families will save on estate taxes in Biden presidency

Wealthy families may still have time to revisit their estate plans — and do so under today’s friendly terms.

Despite the Democrats’ control of the White House and both houses of Congress, Stamper believes the window for estate planning remains open for wealthy Americans.

“I think the exemption and rates will eventually be on the table, but I don’t think it’s likely this year,” he said.

“This administration will be focused on the pandemic and on economic relief and won’t be eager to take money out of the economy,” Stamper said.

The new administration may also choose to avoid the politically charged estate tax debate this year, given the relatively small revenue it generates, said Alvina Lo, chief wealth strategist for Wilmington Trust.

Households will file about 4,100 federal estate tax returns for people who died in 2020 — only approximately 1,900 of them will be taxable, according to estimates from the Tax Policy Center.

Those returns could generate roughly $16 billion in estate tax liability for 2020, the center estimated.

“The estate tax is not a big revenue raiser,” said Lo at Wilmington Trust. “It’s a drop in the bucket in terms of paying for things like the stimulus package.”

“Even with a Democratic president, House and Senate, the estate tax may not be at the top of their agenda,” she said.

In other words, the window to use the huge exemption to avoid estate taxes may remain open for another year.

“We have two kinds of clients,” Lo said. “Some were gung-ho and put strategies in place before year-end, while others were on the fence and may now take action in the first quarter.”

It is not just the tax policy outlook that’s driving estate planning.

“With interest rates at historic lows and many asset values depressed, there are opportunities to pass on those assets to others at a low cost,” said Stamper of Grant Thornton.

Two of the most popular vehicles to achieve that goal are grantor retained annuity trusts and charitable lead annuity trusts.

Both types of trusts move assets with high appreciation potential —— typically business assets or securities – into an irrevocable trust.

The grantor retained annuity trust makes payments to the grantor for a specified term. Once the term is up, the assets go to heirs.

Meanwhile, the charitable lead annuity trust pays a stream of income to a charity for a stated period before the remaining assets pass to a beneficiary.

“The objective is to freeze the value of the estate assets for tax purposes,” Stamper said. “The potential future appreciation of those assets can then be passed on to beneficiaries tax-free.”

Wealthy families weighing these strategies need to consider a trade-off: While they’re saving on taxes, they’re also relinquishing control of the assets.

“Good business owners are typically control freaks,” Lo said. “It’s very hard for them to give up control of their businesses to a trust.”

As powerful as these estate-planning strategies can be in terms of tax savings, they are not for everyone.

These tactics may make the most sense for people with estates that exceed $25 million, said Stamper.

Even if the exemption is cut in half during President-elect Biden’s term, a married couple will still be able to pass on nearly $12 million to their heirs tax-free.

“If you’re not going to be taxed, some of these transfers can hurt you,” Stamper said.