The potential of higher taxes on gifts and estates after Democrat Joe Biden enters the White House in January is giving a lot of Rhode Island business owners reason for pause.
Should they move now to try to minimize any tax? Should they start to make those gifts of stock or other assets in 2020, under the tax reform set by the Trump administration?
Accountants who work with high-income, high-net worth individuals and business owners say it’s a good idea to start those conversations. But because there is so much uncertainty about the makeup of the incoming Congress, there is no fixed solution.
As a candidate, President-elect Joe Biden said he wanted to lower the gift and estate tax exemption, as well as increase the tax rate to 2009 levels, according to the Tax Foundation. For the tax rate, that equates to an increase from the existing 40% to a top rate of 45%, according to Thomas Lisi, the office managing partner at Marcum LLP in Providence.
In addition, of significance is the potential for the lowering of the amount exempted from taxes, from $11.58 million to $3.5 million per person, where it stood before Republican President Donald Trump took office.
How many more Rhode Islanders would have assets in that lowered range? Brad McGuire, a tax partner at Blum, Shapiro & Co. in Cranston, said it could easily “triple the number, at least, who are subject to that.”
In addition, statements made by the Biden campaign indicate he may favor the elimination of the step-up in basis at death, which allows heirs to avoid paying tax on the appreciation of an estate or assets they inherit. That too can be significant for assets, such as stocks and property, that have gained value over many years. Under the current tax policy, heirs only pay income tax if they sell the asset, for the amount it appreciated after the person’s death.
Combined, the prospect of both changing has inspired a flurry of inquiries from clients, according to many accountants.
‘We’ve been talking with our clients, prior to the election and after the election.’
THOMAS LISI, Marcum LLP Providence office managing partner
“We’ve been talking with our clients, prior to the election and after the election,” said Lisi. Now everyone is paying attention to the runoff election for two Senate seats in Georgia, which will determine the balance of power in Washington, D.C., for the next two years.
Tax policy requires congressional approval, not just the demands of a particular president. “There are very few things in tax law that you can do through executive order,” said McGuire.
Nevertheless, some clients want to move now, before any changes are made and possibly imposed retroactively.
Lisi said he has one client who is determined to make a gift transaction final before year’s end to avoid additional taxation.
“You can try to utilize that $11 million exemption, to be safe, prior to the end of the year,” Lisi said. “I have someone now who is very anxious to try to accomplish something between now and Dec. 31.”
While no one knows what is going to happen in January, most clients of Peter Brown, the Citrin Cooperman & Co. LLP Providence office managing partner, are taking action in 2020.
“The majority are doing something now. I don’t think there’s a client that’s not looking at this,” Brown said.
Much of the Biden proposals lack specifics because they haven’t been subject to legislative analysis or scrutiny. But what accountants have determined is they fall into three areas, said McGuire.
The area with the greatest impact is the step-up to fair market value for estate assets. For example, under current law, if someone paid $20,000 for Apple Inc. stock 20 years ago and it has now appreciated to $1 million, upon the owner’s death the asset will “step up” to that value. The heirs will not pay tax on the appreciation if it is sold.
The removal of that provision would mean the heirs could be subject to tax on $980,000 in capital gains.
McGuire said he advises people to have conversations with their tax accountants or lawyers about the possible ramifications.
“These things typically take some time, consideration and thought,” he said.
The potential for an increased tax obligation for gifts is likewise profound if the exemption is lowered per-person from $11.58 million to $3.5 million.
“When you’re looking at a family-owned business, maybe you think Junior is not ready to take over the reins,” McGuire said. “But the difference in tax on that $8 million drop in exemption, and when you multiply that by two for a husband and wife, you’re talking some significant dollars. There are reasons to begin to think: Do I put shares in a trust? Do I go ahead and give them to Junior?”
The conversations should take place in the context of what makes good business sense, he said, not just what is advantageous from a tax perspective.
“Have intelligent, informed conversations with your tax attorneys and your lawyers and see if there are things out there that you probably should have been thinking about anyway,” McGuire said.
Mary MacDonald is a PBN staff writer. Contact her at Macdonald@PBN.com.
