Tax Changes to Plan For

With Change Comes More Change: A few key points

A new presidency will likely bring sweeping tax changes to the current economic environment. There are a few, related to estate planning, that I wanted to bring to your attention before the end of the current tax year in case you want to make some changes. These are proposed changes and at this time we don’t know what will actually transpire.

TAX burden on two walking men.
  1. Reduction of the estate tax exemption from $11.58 million to perhaps half of that, or less.
  2. Elimination of the ‘step-up in basis’ rule.
  3. Reduction in annual gift tax exclusion, currently $15,000 to each person, per year.

Also note that the Secure Act was passed last January and reduces the time period to pay tax on inherited IRA money from the lifetime of the heir to 10 years.


The reduction of the estate tax exemption affects wealthy families whose heirs would receive multiple millions of dollars.  Under Trump, the Tax Cuts and Jobs Act (TCJA) bumped the exemption on wealth transfer from $5.49 million to $11.18 million.  TCJA ends in 2026 but could end sooner under Biden.  The wealthiest families are finding ways to reduce their estate sizes in 2020 where possible to limit the tax burden on their heirs.


Let’s say you bought stock or real estate 30 years ago.  Over time it has increased in value.  This is a capital gain.  If you sold it, you would pay tax on the gain.  If you die, it transfers to your heirs at the current market value.  They can currently sell and would have little or no gain to pay tax on.  If this rule is eliminated and your estate has appreciated assets, your heirs have two headaches:

  • They potentially have to pay capital gains tax on the increase in value
  • They will have to find out what the original value plus investment (basis) of the asset was!


Right now it is possible to reduce the size of your estate, assuming you don’t expect to need some of your money to live on, by gifting $15,000 per person, per year.  So, you could gift $15,000 to every child, spouse, and grandchild, every year.  Each spouse can do that.  It is a strategy for estate planning with a goal of reducing the eventual tax burden on your heirs.   This gifting strategy may change next year, so many are taking advantage of it before the end of 2020.


In early 2020, the Secure Act went into effect.  If you have money in a traditional IRA, your contributions and the growth were never taxed.  Any money residing in a traditional IRA represents a tax burden for your beneficiaries when you pass.  This was always true.  What the Secure Act changed was that instead of your heirs being able to s-t-r-e-t-c-h the taxable distributions over their lifetime, they now have to withdraw all the money and pay tax on it within 10 years.  It can be a significant burden if it affects the heir’s tax bracket. There are some exceptions: spouses, heirs less than 10 years younger, minors, and those with eligible disabilities will still have lifetime-based minimum distributions. 


In some cases, how the value of an asset transfers boils down to whether you pay the tax at your current tax rate, or your heirs pay the tax at their current rate.

Here’s where I have to draw the line.  I can inform you but I cannot advise you, except to say that you should talk to your financial advisor, attorney, and tax advisor to come up with the best plan for you and yours.  Knowledge is power and I encourage you to take any steps you need to take quickly because those professionals are, or will be, swamped at the end of the year.

Paper Tigress can help with the implementation of your plan.  We assist with downloading forms, obtaining signatures, preparing checks, determining cash requirements, and a host of other client-side actions that may need to occur quickly.   This can be particularly difficult for those experiencing certain challenges.  Lean on us.  We can help.

Your health and peace of mind are worth every step of this journey.