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Key Estate and Income Tax Planning Takeaways from “Blue Wave” Democratic Victory

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As we discussed many times heading into the election, there were many differences between the Tax Plans and Policy Proposals of Donald Trump and Joe Biden.  Even after the election, there was stimulus relief,  (including changes related to small business owners and the tax-deductibility of PPP loan proceeds).  but that will continue into 2021 along with substantial tax changes that will impact your financial plan in the areas of Estate Planning and Income Tax Planning.  Given all of that, we also updated our year-end Tax Planning and Financial Planning Guides.  Many of the topics in these guides address what to do – given the unknowns at this point (and address some of the questions per the Q&A listed below so check out the above links).

Although nothing is certain yet, we do know that the Biden team (and the Democratic lead House and Senate) have talked about repealing the 2017 Tax Cuts and Jobs Act that gave many tax breaks to both individuals and business owners.  In addition, that bill gave a lot of relief to those wanting to plan to avoid and/or minimize estate taxes.

With that in mind, knowing that the rules will change, I had Marvin Blum, JD/CPA and Founder of The Blum Law firm on the STA Money Hour.  Here is a link to the Podcast. I also had Marvin present a webinar focusing on more detail to FPA Tax and Estate Planning Knowledge Circle, which I host, to further discuss some more strategies in detail.  Here is a link to the FPA Webinar.

In addition, I thought it would be helpful to share with you my interview notes from the January 2020 Episode of the STA Money Hour.  The Q&A notes are listed below.  This Q&A is a good summary of the income and estate planning issues that may be in play as the Democrats enact legislation in 2021 and beyond.

Question #1:  With the “Blue Wave Sweep”, how easy is it now for the Democrats to Change Tax Policy?

  • It only takes 50 votes in the Senate to pass a tax increase, unlike the Byrd rule requiring 60 votes to pass a tax decrease.

Question #2:  Based on prior precedent, do you feel any tax law changes will be retroactive – and how far…just January 1, 2021?

  • How early in this Congressional session will they address tax increases?
  • Resentment against Trump is at an all-time high.  Repeal the Trump Tax Act as an act of revenge?  Recall Kamala Harris’ threat in the VP debate.
  • The last time the tax increase was retroactive was 1/1/93, in Clinton’s first term.
  • There’s a lot on Congress’ plate: stimulus, COVID, economic crisis, health care, and possibly an impeachment trial in the Senate?

Question #3:  Based on Biden’s Tax Positions (and the Unity Agenda with Bernie Sanders), what do you believe his priorities will be in terms of changes in both estate and income taxes?

Biden/Democratic Tax Positions

  • Biden has called for a return to 2009 estate tax levels: estate tax exemption of $3.5 million, gift tax exemption of $1.0 million, top rate of 45% (versus 40% today).
  • Eliminate step-up in basis at death.  It’s unclear if there would be a carryover basis or a capital gain tax imposed at death on assets not passing to a spouse or charity.
  • Raise the top individual bracket to 39.6% from 37%.
  • Raise the corporate tax rate to 28% from 21%.
  • Tax capital gains and dividends at 43.4% (39.6% + 3.8% Obamacare tax) if income above $1 million.
  • Wages above $400,000 exposed to full 12.4% social security taxes, plus Medicare tax of 2.9% + 0.9% surcharge, for total payroll tax of 16.2%
  • Phase-out 20% pass-through deduction if taxable income above $400,000.
  • Cut back itemized deductions if income above $400,000 and cap benefit at 28%.
  • Like-kind exchange:  repeal like-kind exchange of real property if income above $400,000.
  • Enact a Premium Tax to pay for Medicare for All?
  • Will Biden fund more to IRS to step up enforcement?
  • Consider an annual “Wealth Tax?”

Question #4:  Before Obama left office, he tried to get the IRS to make several changes related to discounting and the elimination of other Estate Planning tools.  Do you see Biden going down that same path? 

Further Speculation Based on Obama Proposals

  • Valuation Discounts (“Squeeze” Planning):  resurrect Section 2704 Regulations, or seek legislation?  I talk about this quite a bit in these articles on Family Limited Partnerships (FLP).  Here is a good “primer” if you aren’t familiar with the concept of an FLP.
  • Grantor Trust Planning:  (1) if assets were sold to a Grantor Trust, those assets would be included in the Grantor’s estate; (2) toggling off the “defect” to convert from Grantor Trust to Complex Trust would create a taxable gift; (3) distributing an asset to a beneficiary other than the Grantor would create a taxable gift.
  • Dynasty Trusts (GST Exempt Trusts):  GST exempt status would be eliminated for trusts with a duration of more than 90 years.
  • GRAT: (1) increase minimum term from 1 year to 10 years; (2) remainder interest must have a minimum value equal to the greater of 25% of the assets contributed to the GRAT or $500,000.
  • $15,000 Annual Exclusion Gift: impose an annual cap of $50,000.
  • Carried Interest: switch from LTCG treatment (with 3 year holding period) to ordinary income for gains allocated to partners in connection with the performance of services.

Question #5:  For those with larger taxable estates (and possibly you can share what should be considered large during the Biden administration), what should they do now…what are the priorities?

What Do I Do Now?  Estate Planning Tips

  • Use it or lose it ($11.7 million exemption to sunset in half in 5 years)—Expect an early sunset.
  • Do “Squeeze & Freeze” planning before the “Golden Age of Estate Planning” ends.
  • Explore gifts & sales using Family Limited Partnerships (FLP), Intentionally Defective Grantor Trusts (IDGT), Beneficiary Defective Inheritance Trusts, Spousal Lifetime Access Trusts (SLAT), Grantor Retained Annuity Trusts (GRAT), Irrevocable Life Insurance Trusts (ILIT), Charitable Lead Trusts (CLT), Charitable Remainder Trusts (CLT), a Qualified Personal Residence Trusts (QPRTs).
  • Historically low AFR interest rates are ideal for intrafamily loans/sales; supercharge certain planning techniques.
  • Have your cake and eat it too:  retain access, retain control, retain flexibility.
  • If a couple is only willing to give $11.7 million, make the gift entirely from one spouse and don’t gift split.
  • Make a quick gift of cash to the Grantor Trust now, and then later swap the cash for discounted assets.

Question #6:  In addition to the Estate Planning Tips, with the possible “repeal” of the 2017 Tax Cuts and Jobs Act, what are some Income Tax Planning Tips our listeners should consider?

What Do I Do Now:  Income Tax Tips

  • Accelerate income, defer deductions (in case of income tax rates don’t rise till 2022).
  • If you have any plans to sell any real estate holdings, it could be a good time to consider a sale using a 1031 Exchange (a tax-free exchange of real estate as Biden has discussed eliminating these exchanges as a tax “loophole”).
  • Elect out of installment sale treatment, paying the tax early but at lower rates.
  • Sell assets with gains, in order to pay the currently lower long-term capital gains rates.
  • Convert to Roth IRA, to pay the income tax at today’s lower ordinary income tax rate.
  • Create Charitable Remainder Trusts, as deferring gains is even more appealing with higher long-term capital gains rates.
  • Itemized Deductions:  push to next year in order to reduce next year’s income, but watch for the return of the Pease cutback.
  • State and Local Taxes (“SALT”):  for SALT above $10,000, pushed to next year in case SALT limit is repealed.
  • If stepped-up basis goes away, parents should sell appreciated assets, pay the tax, and gift the cash (otherwise, the gift is overstated by the future tax to be paid on the gain).
  • Take charitable deduction for non-itemizers (in 2021, $600 married/$300 single).
  • SECURE Act now important again – Elimination of Lifetime Stretch, RMDs again in 2021+ (possibly higher taxation as well in 2021+, QCDs during life post-70 ½, More Beneficiaries, Life Insurance (wealth replacement or to pay taxes), and Charitable Planning/Beneficiary at death.
  • Like many are doing now…Consider moving to a state with no income taxes like Texas!


Financial Planning and Investment Advice offered through STA Wealth Management (STA), a registered investment advisor.  STA does not provide tax or legal advice and the information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters or legal issues, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. Use only at your own peril.


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