Having a plan which protects and preserves your wealth for generations to come is what is most important to us.

By Benjamin Trujillo, Senior Advisor and Anna McDonald

Elections inspire change, and if there is one thing we can expect from 2020, it is change. Nearly every aspect of life has been altered due to the Coronavirus pandemic, the election cycle included.

Financial preparation for an election, no matter the outcome, is critical to maintaining consistency and health in your monetary landscape. This year, a change in leadership will almost certainly result in the tax landscape shifting, making it important to ready your financial life now.

Here are a few themes those with significant wealth should consider now.

Revision in Estate Tax Law

As it currently stands, the estate tax exemption is $11.58 million for individuals and $23.16 million for married couples. The exemption equals the monetary value of a taxpayer’s assets which avoids federal taxation, meaning you could pass down a significant amount of wealth without incurring federal tax.

Should Democratic Presidential candidate Joe Biden be elected, the current exemption is likely to fall back to historic levels. Our advisor team at Compardo, Wienstroer, Conrad & Janes estimates the exemption will most likely end up somewhere between $3.5 and $5 million. For those with an estate value greater than $3.5 to $5 million, it is time to consider enacting contingency plans.

Currently, the estate tax is 40%. However, this number could increase to 45%. Sheltering your estate is vital to protect and pass down wealth to your heirs.

Right now we are working with clients to develop a plan which takes advantage of the current high exemptions and relatively low tax rate. While there is an opportunity for some to be grandfathered, we want clients to take proactive steps before the end of the year, or at least before any bill is proposed to Congress in early 2021.

What type of action makes sense for you? We recommend considering the following planning opportunities:

  • Review and update current estate planning measures which would benefit from the high exemption.
  • Evaluate and make additional charitable contributions.
  • Take advantage of a Spousal Lifetime Access Trust (SLAT) or other relevant planning techniques.

Even if leadership remains the same, the higher estate tax sunsets in 2025 making it important to take advantage of the current laws now. If you don’t have a plan and you have a taxable estate a significant portion of it could end up being funneled to the government.

Increase to Capital Gains Tax

Capital gains refer to the profits you earn on investments like stocks, bonds, and real estate. Capital gains tax is the system by which those earnings are taxed.

While short-term capital gains (assets held less than one year) are taxed as ordinary income, long-term capital gains (assets held at least one year) are taxed on a scale of 0%, 15%, or 20%, depending on your income.

Long-term capital gains are currently taxed at a favorable rate for many investors, but changes in legislation could nearly double the highest current rate. With Biden’s proposed changes, people would see long-term capital gains taxed at ordinary income rates for anyone whose income exceeds $1,000,000.  These folks would be in the highest bracket across the board.

This increase represents a potential jump from the current 20% long-term capital gains rate to a 39.6% capital gains rate. A 19.6% bump will have a significant effect on an investment portfolio, making it important to plan and prepare tax-efficient strategies now.

Our team is keeping a close eye on the election and any changes which occur due to the outcome. Should we change to democratic leadership, the capital gains proposal could go into effect retroactively to the beginning of 2021. This proposal will prompt us to evaluate our client’s portfolios and see if and where it may make sense to accelerate certain gains into 2020 so they are taxed at the current lower rates.

We are careful to examine and identify the assets most likely to result in negative tax outcomes and work to implement strategies to avoid such a pitfall. While we shy away from timing the market, we are going to strive for tax-efficient decisions.

Potential Repeal of the Tax Cuts and Jobs Act (TCJA)

Joe Biden has proposed significant changes to the Tax Cuts and Jobs Act. The TCJA was passed four years ago with the objective of lowering corporate tax rates (from 35% to 21%) and boosting businesses. The proposed Biden revisions intend to reduce the differences between the wealthy and lower-income earners.

While it’s unclear which aspects of the TCJA would ultimately be most impacted, people who make over $400,000 per year can expect to pay higher taxes. For starters, Biden’s plan proposes increasing the maximum tax rate from 37% to 39.6%. On the deduction side, Biden’s plan calls for a return to limiting itemized deductions by capping the value of itemized deductions at 28%.  For business owners, Biden’s plan also proposes to eliminate the 20% Qualified Business Income deduction for anyone again making over $400,000 per year.

As you can see, the scope of these changes are broad and while currently uncertain, they will be significant if enacted.

The Bottom Line

Financial planning is fluid and adaptable. It is important to know when to make decisions which will have a positive impact on your money and life. Depending on the outcome of the election, many changes could have a significant impact to high-earners and those with significant wealth.

For high-net-worth individuals and families, proactively developing a plan is the best course of action. That might mean having multiple plans in place to support all types of outcomes of the November elections.

Having a plan which protects and preserves your wealth for generations to come is what is most important to us. We are committed to helping you prepare for any changes coming your way.

Would you like to discuss how the election could impact your finances? Get in touch with an Advisor at Compardo, Wienstroer Conrad & Janes today.

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