Estate Planning in the 2020 Election Year

“With the election this year, estate tax exemption limits could change. The exemption is at the highest level ever and if Democrats take office, it will most likely be reduced before the 2025 sunset. We can wait until they are elected to make a decision, but it’s still something to think about this year to be ready to pull the trigger if needed.”

Anna Katherine Davis, CFP®, Client Service Manager


Coming into 2020 the US economy was hitting on all cylinders, with record low unemployment, the longest bull market in history, and soaring consumer confidence. The only black mark on an otherwise healthy economy was a soaring Federal deficit projected to pass $1 trillion in 2020—a rare phenomenon during peacetime and with a flourishing economy. In fact, the last time we had a similar backdrop—a long bull market, low unemployment, etc.—was the late 1990s, and in that period we actually managed to run a budget surplus.  Furthermore, while a trillion-dollar deficit is bad enough on its face, it becomes even more shocking when you consider that those projections were done before the COVID-19 pandemic and its resulting economic devastation.

Adding the current crisis to the equation means an even larger deficit for 2020 than expected. With the recently passed CARES Act, which is expected to cost about $1.6 trillion, added to the inevitable drop in tax revenues, 2020 could end up breaking all kinds of records from a deficit perspective. In fact, new budget estimates from the CRFB, a Washington-based watchdog group, estimate the deficit will hit a staggering 18.7% of GDP in 2020. That level of spending would push our national debt-to-GDP ratio (a key metric for investors) over 100% for the first time, the CRFB predicts.

Of course, 2020 is an election year, and President Trump had hoped to come into the election season with a strong economy to show voters. However, with his approval rating dropping and his chances for re-election predicted to be 50-50, the probability of a change in tax policy appears to be on the rise. If Democrats win, will they content themselves to wait until 2025 when the recent Trump tax cuts revert to prior law? With a deficit this large—can they afford to wait?


Will Washington Use Estate Taxes to Plug the Deficit?

While there are many different ways to raise taxes, it is not hard to imagine that estate taxes would be a prime suspect. Regardless of how you feel about the estate tax, it has been used historically to raise money when deficits skyrocket. The earliest precursor was the Stamp Tax of 1797, which charged a tax on the official stamps required on wills when a person died. This tax raised funds for a war on France that began in 1794 until Congress repealed it after the war ended. In the 1860s and 1890s, Congress again implemented an estate tax to pay for the Civil War and Spanish-American War, respectively. The modern estate tax system was created to raise money for the First World War, and we have had an estate tax ever since.


What is the Estate Tax?

As a quick summary of the estate tax, it is applied to a person’s wealth (called their “estate”) at death before any distribution to the heirs. However, most estates never pay the tax, because there is an exempted amount that can pass tax-free before the tax comes into play. For most of the 1990s, the estate tax exemption was around $600,000 per person or $1.2 million per couple. In 2002, it increased to $1 million per person and continued to grow gradually through both Bush and Obama presidencies to reach $5 million by the time President Trump took office. In 2017, Trump signed the Tax Cuts and Jobs Act (TCJA), which doubled the exemption to $10 million until 2025, at which time it reverts to the pre-TCJA level. (Each year these amounts adjust for inflation, so the estate tax exemption currently sits at $11.8 million per person or $23.6 million per couple.) For any estates worth over the exemption amount, taxes are due at up to a 40% marginal rate.



How Many Estates Will Face the Death Tax?

In 2001, 2.2% of estates faced the estate tax. By 2016, that figure had fallen ten-fold, and experts estimate less than 0.1% of estates faced taxation last year. Because of the increase in the exemption over time and the ability of married couples to preserve exemptions between them, very few of the upper-middle class in the U.S. have had to worry about planning for estate taxes. However, this could change dramatically with a drop in the exemption, affecting many who have simply saved and invested wisely over a lifetime, and not just the ultra-wealthy.


Planning Options to Reduce Exposure to the Estate Tax

The good news is that proper planning can reduce or even eliminate the estate tax in many cases. Your advisory team—consisting of your Gratus wealth advisor, attorney, and accountant—can design a plan to mitigate estate taxes to the extent possible, and plan for ways to pay for them when unavoidable. Charitable trusts (CRTs), intentionally defective grantor trusts (IDGTs), and irrevocable life insurance trusts (ILITs) are just a few of the many tools from which they can choose. 2020 may be a good year to review your estate plan with your advisor, with an eye towards the future of the estate tax exemption.


Curtis Hearn, CFP®
Wealth Advisor
Wealth Management