Economic policy proposals are an important part of every presidential candidate’s platform. So, as the 2020 elections draw closer, it’s no surprise that potential changes that could impact the economy have drawn increasing attention. One component that should be of interest to investors: the possible tax implications, depending on who declares victory.
Post-presidential election, there are generally two potential scenarios, says Michael D. Lum, a Senior Wealth Planning Strategist for Wells Fargo Private Bank: “Continue the types of policies in place during the previous term, or possibly see several significant changes that may affect wealth planning.” In 2020, all 435 House seats and roughly a third of Senate seats are up for grabs as well, and the outcomes of those contests could also impact the direction of tax policies.
Here, Lum shares the details of four tax-related policy proposals to watch with the 2020 elections around the corner.
1. Potential reduction in the estate tax exemption
Depending on which party is leading the country after the 2020 elections, the estate tax exemption, which in 2020 is at a historic high of $11.58 million per person, could drop back to $3.5 million.
“Policies could be changed to dramatically reduce the exemption,” Lum says. “The result is that some of the estate planning tools we have been recommending, including certain types of trusts and powers appointment, would need to be revisited if they no longer offer estate planning advantages.”
2. A potential reduction in the gift tax exemption and potential elimination of annual exclusion gifts
Though the lifetime gift tax exemption is currently the same as the estate tax exemption— $11.58 million—Lum says there has been talk in some political circles of reducing the gift tax exemption to $1 million, so that the gift and estate tax exemptions would no longer be the same. Lum also says there is potential that the annual exclusion gift of $15,000 per person could be eliminated.
“A reduction in the gift tax exemption to $1 million would not only significantly affect gift tax planning, but also likely curtail the ability to plan for asset protection,” Lum says.
Lum offers another consideration: “In a commonly used technique that provides liquidity to estates to cover estate taxes, people often use annual exclusion gifts to irrevocable life insurance trusts to help pay life insurance premiums. Instead, they might consider transferring income-producing assets to those trusts and using that income to pay the premiums.”
3. A repeal of step-up in basis
At the death of a person owning a capital asset, the step-up in basis policy eliminates built-in capital gains that accrue during life. This allows heirs to inherit property free of built-in gain and to take a basis in the inherited property equal to its fair market value at the time of the benefactor’s death. If this policy is repealed, heirs would take a carryover basis in inherited property and, upon sale, would have to pay capital gains taxes not only on the gain accruing during the time they owned the asset, but also on the gain accruing during the time the benefactor owned the asset.
“A large part of wealth planning centers on the ability to avoid capital gains taxes on assets—such as stocks—that can appreciate significantly between the time they were purchased and the time they are passed on to an heir,” Lum says. “A change in the policy could change estate planning for capital gains.
4. An increase in long-term capital gains tax
Another potential policy affecting capital gains is a proposal to increase the tax rate applicable to long-term capital gains. “Long-term capital gains are taxed at a different rate than ordinary income,” Lum says. “A high-income earner might be in the 37% income tax bracket, but only pay 23.8% on capital gains. One proposed change would be to tax everything above $1 million at 37%. Investors considering making a sale that could be subject to this policy might want to do it sooner rather than later.”
At the moment, all of these policy changes are just talk, Lum points out. It’s possible nothing will change, at least not in the near term, regardless of who wins in November.
“That said, if these policies do come to pass, they could significantly impact a high-net-worth individual’s wealth plan,” Lum says. “We recommend meeting with your wealth planning strategist well ahead of the election to address these proposals. We can talk about your financial goals and perhaps adjust the timing of some of your wealth-planning decisions to help maximize the benefit to your estate.”