Asian boy smiling and enjoying tasty beverage while sitting between father and grandfather in park

Don’t Look Back and Wish You’d Seen the Opportunity to Save Taxes for Subsequent Generations through Lifetime Gifting


Heading into a volatile election season, the risk of higher income and estate taxes in 2021 and beyond is a very real concern for our affluent clients.

Today’s federal income and estate taxes are historically low (even if it might not feel like it!) and with the tremendous COVID-related stimulus spending plus the prospect of a shift in the White House, most seasoned observers and economists are forecasting higher estate tax and income tax rates moving forward.

What does that mean for you – bottom line?  If you think of the taxes you and your family pay/will pay across generations (rather than just the taxes you pay during your lifetime), then you should consider exploring strategies to gift assets to subsequent generations before the end of this year.

Simple gifting strategies (like giving up to $15K per person per year) are easy to implement and can really make a difference over time.  More powerful gifting strategies (such as creating intra-family loans, gifts to trusts, or charitable planning) combined with today’s historically low interest rates can be more immediately powerful in reducing the taxes paid by generations of your loved ones.

Under today’s laws, individuals can give away during their life or at their deaths up to $11.5M ($23M for married couples) before the federal estate tax of 40% kicks in.  Not too much to worry about for the vast majority of even affluent people, right?  Not quite.  Candidate Joe Biden proposes two major changes to the current estate tax setup:  (1) rolling the exemption amount back to “historical levels,” which means approximately $4M for individuals and $8M for married couples and (2) eliminating the step up in basis for capital gains purposes that currently occurs at the passing of an individual.

Even if President Trump retains office, the current estate tax law is set to expire in five years and drop the “exemption” amounts to $6M for individuals and $12M for married couples – and it’s difficult to see how a divided Congress would agree to push the exemptions back up.

If the country moves to the left politically and Democrats take power in the White House and in Congress, they would be able to change the estate tax laws effective January 1, 2021 (even if they passed the law later in 2021).  However, the IRS has made it reasonably clear that gifting that takes place in 2020 under current laws won’t be “clawed back” if the laws change.

I mentioned above that federal income taxes are historically low.  That’s not quite the case for California state taxes.  In fact, California legislators have proposed (just proposed – these haven’t passed yet) bills that would further raise income taxes for Californians earning over $1M per year and place a California-based wealth tax on high net worth estates over $30M.

Now, these California-specific proposals probably don’t raise too much concern for most of you because very few people earn over $1M per year and/or have a net worth over $30M.  However, they are a sign of the short and medium-term direction:  taxes are likely to go up for most affluent Californians!

Don’t look back after 2020 and wish that you had the vision to consider advanced planning during that window of opportunity.