We are just over one week removed from Election Day and the final results of the 2020 election are still being tabulated. Announcements of the initial vote total felt like being at the eye doctor’s office: “better 1 or better 2?,” with neither option providing a clear focus. However, while there remains a lack of precise clarity for the final results, which are subject to continued counting, recounts, lawsuits, certification and Electoral College voting, the impact on tax and estate planning is coming into focus.

At the time of this article it appears that the following outcomes exist:

• The Democrats will remain the majority party in the House with an eight seat majority.
• The Republicans currently hold 50 seats in the Senate. The determination of which party will control the agenda in the Senate is uncertain and will remain so until the runoff elections for both Georgia seats are held on January 5.
• The President will be Joe Biden.

Prior to the election, we discussed in our article, “Planning for the Shifting Sands of Taxes,” the various tax proposals of Joe Biden and the impact of a Senate governed with Democrats in the majority, the so-called “Blue Wave.” Election night turned the Blue Wave into a Blue Wake. However, as results continued to trickle in, it became clear that the focus will be squarely on Georgia for the next two months. The outcomes there will determine whether Republicans or Democrats set the Senate agenda.

As a reminder, Joe Biden’s campaign proposals include:

Individual Income Tax Proposals

• Income tax bracket rates
  • Rolls back Tax Cuts and Jobs Act of 2017’s income tax rates for taxpayers with incomes above $400,000
  • Increases top rate from 37% to 39.6%
• Long-term capital gains rate changes
  • Ordinary income tax rate (39.6%) applies to capital gains for households earning more than $1 million
  • Same rules apply to qualified dividends
  • Repeals “step-up in cost basis”
• Limits the tax benefit of itemized deductions to 28%
• Creates a phase-out of the Qualified Business Income Deduction under Section 199A for tax filers whose taxable income exceeds $400,000

Estate Tax Proposals

• Estate exemption lowered to either:
  • $5 million, not explicitly stated but presumed as part of proposed rollback of certain provisions of the Tax Cuts and Jobs Act of 2017, or
  • $3.5 million, based on proposals that were discussed when he served as Vice President
• Eliminate “step-up in basis” at death
  • It remains to be seen whether the plan would tax the gains at death as if assets are sold or if basis carries over and gains would be taxed at subsequent sale by heirs

Payroll Tax Proposal

• Payroll taxes (12.4%) would apply to wages in excess of $400,000

Corporate Income Tax Proposals

• Increases tax rate from 21% to 28%
• Creates an alternative minimum tax on corporations with profits of $100 million or higher

Miscellaneous proposals

• Increase the minimum wage to $15

It is unlikely that Biden’s campaign proposals will become law as initially proposed. The division in the Senate, even if the Democrats sweep the Georgia runoffs, will require unanimity among every Democratic Senator in order to pass a tax bill. Therefore, it is more likely that changes to the tax code will occur as a result of horse-trading with some give and take as opposed to a more unilateral approach resulting in radical, across the board change. In addition, any change is unlikely to be retroactive.

The likely divided House, Senate and President will require collaboration and compromise in order for anything to pass and be signed into law. This is not unfamiliar territory for either Joe Biden or Senate Majority Leader Mitch McConnell, as they have worked together before. In fact, in 2013 the increase in the estate exemption from the default return of $1 million to $5 million, along with extension of the qualified charitable distribution and other tax matters, were negotiated by the two of them.

This year in particular, in the event that the tax sands shift, affluent families have been moving forward with planning to utilize the increased gift, estate and generation-skipping exemptions prior to the end of the year. As the election clouds clear, what does it all mean for those who were planning to utilize the increased exemptions before year-end?

For most, the answer is to stay the course and complete the planning by year-end. Planning for the utilization of the increased exemptions was not just a 2020 election outcome-dependent event, as the exemptions have always had an expiration date of December 31, 2025. Utilizing the increased exemptions by executing the necessary documents, along with the gifting and funding necessary, with a year-end completion target should remain the focus for most families, regardless of political outcomes.

For those clients that have been unsure about making gifts or that have timing issues related to asset selecting or titling, there may be a slight opportunity to pause in order to consider and/or implement these items in a more strategic and thoughtful manner. Continue to discuss exemption planning matters with counsel. The slight pause offered by election results may allow for gifts to a spouse, where necessary in 2020, followed by the spouse’s gift to a Spousal Lifetime Access Trust (SLAT) possibly occurring early in 2021.

The conclusion of our July 16 article, “Planning for the Shifting Sands of Taxes,” remains true today:
“There are a number of variables that must fall into place before implementation of Joe Biden’s tax policies would occur. Besides his election as President, the most important may be the control of the Senate. Regardless of the election outcomes, your Oxford team is positioned to ensure that our affluent family clients continue to develop well thought out wealth enhancement strategies and implement them timely and efficiently. Consultation with your Oxford team and an analysis of the possible impact of any tax policy, regardless of the candidate, will allow your full team of advisors to identify the optimal solutions for your family.”