By Ross Bruch, Senior Wealth Planner - | PHILANTHROPY & WEALTH PLANNING - BBH.com
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| PHIL ANTHROP Y & WEALTH PL ANNING
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1 | Women & Wealth MagazineFormer Vice President and Democratic presidential nominee Joe
Biden recently released his corporate and individual tax plan. Biden’s
proposed plan aims to raise approximately $3.2 trillion in new and
increased taxes over a 10-year period, with most of the burden falling
on large corporations and high-net-worth individuals. While there
are many uncertainties in the legislative path forward, it is important
that taxpayers work with their advisors to examine their current tax
situation and prepare for a range of planning scenarios through the
end of 2020 and into 2021.
Biden’s Tax Proposal With those influences in mind, some of Biden’s key policy
ideas include:
Biden’s plan appears to be largely influenced by three
primary factors. First, as a long-time deficit hawk, he seeks
• Increase the corporate tax to 28% (up from 21% under
to address the significant increase in the deficit’s size over
TCJA, but lower than the 35% rate in effect prior to
the past four years (which has been further exacerbat-
TCJA).
ed by the COVID-19 pandemic). Second, Biden hopes
to roll back several tax cuts and rate reductions enacted • Repeal the 20% pass-through deduction of qualified
under the 2017 Tax Cuts and Jobs Act (TCJA). Third, pos- business income for taxpayers with over $400,000 in
sibly to capture a greater percentage of voters on the income. This deduction was enacted under TCJA and
far left, Biden seems to be open to tax ideas previously is currently set to expire in 2026.
monopolized by far more progressive candidates. (He
• Impose a minimum book tax equal to 15% on global fi-
has, however, stopped short of endorsing some of the
nancial statement profits for companies with over $100
most extreme ideas, such as a wealth tax and a financial
million in annual income that otherwise pay zero or
transaction tax.)
negative federal income taxes for the year.
Fall 2020 | 11| PHI L ANTHROP Y & WEALTH PL ANNING
• Double the global intangible low tax income on certain tax laws with better knowledge of how policy changes
unrepatriated low-tax earnings to 21%. will affect their income and wealth. Unfortunately, due to
the pandemic, the current planning situation is highly un-
• Repeal like-kind exchange deferrals for real estate.
predictable. A new administration may try to apply new
• Institute a 12.4% Social Security payroll tax, to be split taxes retroactively to January 3, 2021 (the first day of the
between employers and employees, on income earned 117th Congress), even if they are drafted and approved
in excess of $400,000. (Wages between $137,000 – the later in the calendar year. This is not completely unprec-
current cap – and $400,000 are not taxed.) edented. On rare occasions, retroactive taxes have been
enacted and deemed constitutionally permissible. There
• Raise the top tax bracket for individuals from 37% to
are several limits on when tax rates may be raised retroac-
39.6% (the top rate prior to TCJA) for taxable income
tively (yet “new” taxes may never be created retroactively),
above $400,000. The top tax rate is currently set to re-
though the nuance of these limits is beyond the scope of
vert to 39.6% in 2026 without legislative intervention.
this article. It is far safer to plan around the assumption
• Eliminate a preferential capital gains rate on income that if taxes go up, they will do so as of January 3, 2021.
above $1 million.
Planning Opportunities
• Abolish the basis step-up at death for inherited assets.
Although every planning situation is different, if Biden is
• Restore the pre-TCJA limitation on itemized deductions
elected, some of the most important planning ideas to
for taxable income above $400,000.
consider before year-end are as follows:
• Return the gift and estate tax exemption and rate to
their “historical norms.” Use remaining estate tax and generation-skipping
transfer (GST) tax exemptions
Uncertainties Abound The current federal estate tax exemption amount ($11.58
The odds that many of these ideas are enacted exactly million per person) is scheduled to sunset to its pre-TCJA
as Biden has proposed them are low. Although Biden amount (adjusted for inflation) in 2026. Biden’s proposal
currently leads in the polls, this could easily change. suggests returning this amount to its “historical norm.”
There are also impediments that could alter or block What Biden means by historical norm in this context is un-
Biden’s proposal even if he is elected president. To control clear, but some tax experts believe he may aim to reduce
Congress, Democrats need to both retain their majority the exemption amount to the $3.5 million exemption
in the House of Representatives and pick up at least three proposed by the Obama administration in 2014. The same
Senate seats. Even with those three seats, the Democrats may be true for the GST tax – an essential component
will have no margin for error due to a 50-50 divide in the in dynastic estate planning – which has an equivalent
Senate (assuming both independent senators vote in line but separate exemption amount that Biden could also
with Democrats) and will need to rely on a vice president propose to reduce.
tiebreaker vote. Additionally, some Democratic sena-
tors may not welcome the idea of instituting tax reform Taxpayers with adequate assets that wish to make direct
during an economic crisis and with the 2022 midterm gifts to their descendants or fund multigenerational trusts
elections just a short time away. Memories of the Tea Party should be able to use their remaining exemptions easily.
movement that grew in response to the Obama adminis- Before making these gifts, taxpayers may want to confirm
tration’s tax hikes in 2009 may still be fresh in the minds that they have sufficient access to assets for their own
of some. However, if 2020 turns out to be another “blue lifetime spending needs and that they are funding the
wave” year (like 2018) in which Democrats outperform in gift with the most advantageous assets.
the elections and pick up more than three Senate seats,
they will have a greater margin for error, and the question Using up exemption is slightly more complicated for
will quickly turn from “if” taxes will go up to “how much” taxpayers who are not yet prepared to pass on assets
they will rise. to descendants in 2020. There are several tools planners
can use to work around these concerns, including spou-
It is also important to note that it is unclear when new tax sal lifetime access trusts (SLATs) for married couples and
policies could be enacted. If elected, a new administration domestic asset protection trusts (DAPTs), which are avail-
will be inaugurated on January 20, 2021. Typically, tax able to nonmarried individuals but are more limited in
legislation goes into effect the following tax year, thereby application due to the fact that they must be governed
allowing taxpayers the opportunity to plan around future by one of 19 states that permits their use.
12 | Women & Wealth MagazineBoth SLATs and DAPTs allow donors to contribute funds
to trusts that qualify as “completed gifts” and thus use
some or all of a taxpayer’s remaining exemption; however,
each of these trusts allow some level of family access,
either through a spouse (via a SLAT) or possibly the
donor him or herself (via a DAPT), should they require Although an account owner pays
additional funds for future spending needs.
tax on the funds transferred in the
Convert an individual retirement account (IRA) to a
Roth IRA
year of the conversion, this may
A Roth conversion is a way to convert funds from a still be an attractive planning tool
traditional IRA to a Roth IRA. A Roth IRA is a powerful
retirement savings tool that, like a traditional IRA, allows if the account owner believes he
assets to grow tax free. Unlike distributions from tradi-
tional IRAs, however, those from Roth IRAs are not taxed. or she is subject to a lower tax
Additionally, Roth IRAs do not have required minimum
distributions that slowly deplete the account once the rate now than will be the case in
taxpayer reaches a certain age. Although an account
owner pays tax on the funds transferred in the year of
the future.”
the conversion, this may still be an attractive planning
tool if the account owner believes he or she is subject to
a lower tax rate now than will be the case in the future. income deferral transactions. Corporations may want
to consider paying dividends in 2020 rather than future
Recognize long-term capital gains years. Employers could also consider paying year-end
bonuses to high-income employees in 2020 rather than
If Biden eliminates the preferential long-term capital gains
waiting until after the new year.
rate on income above $1 million, it may be advantageous
for some taxpayers to recognize capital gains now to en-
Partnerships, sole proprietorships, S-corporations and real
sure they are taxed at 20% rather than their much higher
estate investment trusts that have taken advantage of
ordinary income tax rate. However, due to numerous fac-
the Section 199A 20% deductions should consider ways
tors involved in the evaluation process, this should be
to take advantage of them while they are still available.
approached with careful consideration.
A Note on Timing
Make charitable contributions early
Perhaps the most important takeaway from this analy-
If the pre-TCJA limitation on itemized deductions for tax-
sis is that it is impossible to predict November’s election
able income above $400,000 is reinstated, 2020 may be
outcome and what tax policies will look like in the com-
the last year to make large or unlimited charitable contri-
ing years. However, it is also clear that major changes
butions. Taxpayers should evaluate planned giving over
could occur as soon as next year, and it is important that
the next several years and consider making those gifts in
taxpayers are prepared to address a variety of planning
2020 to maximize the tax benefits of their philanthropic
situations. In addition, if the 2021 election warrants year-
goals. If a taxpayer is unwilling to make a large gift directly
end tax planning, there will be an overwhelming rush
to charities this year, he or she could instead establish a
to plan, and attorneys and accountants will not be able
donor-advised fund or private foundation, which may
to keep up with demand. The best approach is to begin
permit the taxpayer to take a larger deduction for 2020
working with advisors now to map out complete gifting
and distribute the funds to charities over time.
and tax strategies under various election and legislative
scenarios. This may involve drafting trusts that may sit idle
Time transactions appropriately
until Election Day, or possibly forever, but it will afford the
Corporations may wish to consider ways to accelerate luxury of making strategic and thoughtful tax decisions
income in advance of a possible corporate tax rate in- without the added pressures that the end of the year may
crease. Corporate sellers will have an incentive to close bring. A BBH wealth planner would be happy to speak
transactions before 2021 and may want to reconsider with you about your options.
Fall 2020 | 13bbh.com/womenandwealth | @AdriennePenta | BBH Center for Women and Wealth | CW&W@bbh.com | facebook.com/bbhcww
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