Election 2020: Wealth Planning Update

8 Minute Read

Pam Lucina, President of The Northern Trust Institute, Chief Fiduciary Officer and Trust & Advisory Practice Executive

While states have not officially certified their results and the election process is complicated by recounts and court challenges, it is widely anticipated that Former Vice President Joe Biden has received enough electoral votes to serve as the nation’s 46th president of the United States. As a result, and discussed below, a “divided government” scenario — wherein one party controls the presidency and the other at least one branch of Congress — appears increasingly likely. Below, we answer client questions on these political outcomes and their most significant impacts on the wealth planning landscape.

The potential for new legislation largely depends on a united or divided government. Where do we stand with the races for the House of Representatives and the Senate?

As of November 8, the Associated Press has projected Democrats to exceed the threshold of 218 seats needed to retain their majority in the House, albeit by a slimmer amount than the current Congress. However, neither party has secured a majority in the Senate. At the time of writing, it is projected that 50 of the 100 seats will be held by Republicans and 48 by Democrats (including two independents that caucus with Democrats). The remaining two Senate seats, located in Georgia, will be decided in a January runoff, as none of the candidates for either seat were able to earn the 50% of the vote necessary under Georgia law to obtain victory. Therefore, unless Democrats win both of these runoffs, we will likely end up with a divided Congress.

If Republicans do retain control of the Senate, the tax policy changes proposed by President Elect Joe Biden during the campaign will likely have to be toned down by the realities of a divided government. However, when President Elect Biden was Vice President in 2012, he had a reputation for being willing to work across party lines. For example, he was able to broker a deal with Senator Mitch McConnell to extend the “Bush Tax Cuts” and avert a “fiscal cliff.” It is therefore possible that we may see some tax policy changes as a result of negotiations, but we are unlikely to see all of the more progressive campaign tax proposals, at least until mid-terms.

How would these political outcomes impact tax planning opportunities?

We continue to urge clients to “plan,” but not “act” — if that action is based on political predictions. Once we have clarity on the path forward and a nuanced understanding of the full spectrum of impacts, we can help clients pivot, if needed. And most importantly, we continue to urge you to be intentional about your goals. Long-term goals should serve as your guide, no matter the political backdrop.

The divided government outcome discussed suggests that the Tax Cuts and Jobs Act (TCJA) of 2017 will likely remain intact. Specifically, gift and estate tax exclusion amounts will likely remain high, historically speaking, for some time. This means that for 2020, an individual can give away $11.58 million tax-free, and next year this amount increases to $11.7 million per individual.

Exclusion amounts are likely to remain at these high levels for the next two years, at least until the mid-term elections, and possibly until they are scheduled to sunset under TCJA at the end of 2025. At that time, exclusions will automatically revert back to $5 million (adjusted for inflation) per individual. Though there is a reduced urgency to make gifts this year under a divided government, if you can afford to make gifts — and it is in line with your long-term goals — we recommend you consider doing so sooner rather than later. This will ensure that you capture any future appreciation outside of your taxable estate and avoid future tax policy changes.

What is the impact of these outcomes on income tax planning?

As noted, a divided government increases the chances that there will be no meaningful changes to income tax rates, at least until the mid-term elections. This means that the top income tax rate is likely to remain historically low, at 37%. Under TCJA, this 37% rate is scheduled to sunset at the end of 2025, when it will revert back to 39.6%. Given the current deficit and additional stimulus spending it is difficult to see how rates could go any lower, but in a divided government scenario we certainly do not expect to see the steep increases proposed by President Elect Biden on the campaign trail. Corporate tax rates will also likely remain low, at 21%, and there is no planned sunset under TCJA for corporate tax rates.

When tax rates are likely to hold steady, year-end tax planning involves determining where you can defer income and gains into future years and accelerate expenses and deductions this year. Also, consider exploring opportunities to engage in tax-loss harvesting, which involves selling investments and mutual funds to offset any taxable gains realized during the year.

Are there wealth planning strategies I might consider regardless of the results of the election?

In addition to being intentional about your goals, there are three strategies worth discussing with your advisors regardless of the election outcomes.

  • Look for opportunities to take advantage of market volatility. While we do not recommend timing the market, election uncertainty can bring swings in the market, which can present planning opportunities. If we continue to see gains, gifts of highly appreciated stock could allow you to take a deduction for the full fair-market value of the stock and avoid capital gains taxes on the sale. If the markets take a dip, converting a traditional IRA into a Roth IRA allows payment of taxes on the conversion at depressed prices while avoiding taxes on distributions in the future.
  • Families and individuals who have a high probability of achieving their stated goals may also wish to consider gifting to flexible trusts in order to utilize the larger, expiring lifetime gift tax exclusion amount. Any dip in the market may present the opportunity to gift at depressed prices.
  • Pay attention to state tax rates in your planning. Several states had tax measures on the ballot. For example, Arizona had a measure that almost doubled the top rate for high earners, which looks like it will likely succeed as of the time of writing, while Illinois voters rejected the implementation of a graduated income tax rate system and will remain a flat tax state.

The federal election also could have implications on states’ budgets, as hopes for a large economic stimulus bill have faded. Under a divided government, large-scale economic support to state and local governments, which are struggling, is less likely to be part of the program. Forty-nine states are required to balance their budgets, and many estimates currently show substantial shortfalls. This will likely put continuous pressure on states to raise taxes or cut programs.

We are currently working with many clients who are considering whether to relocate their residence to low tax states, driven in part by increased flexibility to work from anywhere. Many are also considering whether to establish trusts in order to limit tax exposure. If done properly, incomplete gift non-grantor trusts (ING trusts) may be able to shift the tax exposure out of a high-tax state, such as California, to a state where there is no state income tax, such as Delaware, Nevada or Wyoming. Each state has its own rules about which trusts they consider being a resident of their state and, thus, consultation with your team of advisors is critical before considering this strategy.

The prospect of a lower gift exclusion as early as next year appears to be greatly diminished, but I have already begun revisiting my planning strategies. Should I take a pause?

Tax law uncertainty and the potential for a “Blue Wave” leading up to the election encouraged many wealthy individuals and families to revisit their estate plans and review available tax strategies. Many found they had delayed these planning discussions for too long, regardless of political outcomes. As a result of these discussions, many have already “gotten the band together” leading up to the election, engaging advisors, discussing strategies, reviewing plans and achieving consensus among family, and are motivated to use this momentum to carry through with implementing the plans.

Although the politically driven urgency around tax planning has subsided, it is still a valuable time to revisit your wealth plan given the low interest rate environment, potential federal and state tax increases due to the growing deficit, state tax proposals driving relocation and low asset valuations, which may recover with the economy.

For recent election-related market commentary, read the Weekly Five.


This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.