It is no secret that the polls had their issues in providing us some early guidance on how the Presidency and Senate/House races would end up on Election Day. The Blue Wave that was predicted may not end up materializing. Although Joe Biden is our President-Elect, the outcome in the Senate is still up in the air. Based on Georgia law, neither candidate obtained a majority of the vote in the Senate race, and as such, a runoff election will take place in early January to decide who and (potentially more importantly), which party will represent Georgia in the Senate.
As the count currently stands, the Democrats hold 48 Senate seats, while the Republicans hold 50 seats. Doing some simple math, the Republicans would only need to win one of the two seats in Georgia to retain majority.
What does this mean for tax policy?
If the Republicans can retain a majority in the Senate by winning at least one of the January runoff elections in Georgia, we will have a split Congress with the Dems having a majority in the House and the GOP having a majority in the Senate. This setup could result in a gridlock in which significant changes to the tax law are difficult for President-Elect Biden to get through. I previously discussed some of Biden’s ideas on tax policy, specifically in the estate/gift tax area. With a Republican controlled Senate, it would be unlikely that the estate/gift tax climate would see a major overhaul any time prior to mid-term elections in 2022. But, we will not know for sure until the January elections in Georgia.
What does this mean for estate planning?
At this point, it may be difficult to predict the results of the Georgia elections in January. What is clear is that even if the Republicans can retain a majority in the Senate and major tax law changes are unlikely, it is still a great time to transfer wealth. The taxpayer-friendly environment currently is the result of the perfect storm of these circumstances:
- Historically large unified credit (estate/gift tax exemption): With exemption amounts in excess of $11.5 million per taxpayer, business owners can transfer a large dollar amount of wealth before bumping into the exemption and having to pay gift tax. Gifts will remove appreciating business interests from the owners’ estates and with no claw back, this likely reduces estate taxes owed upon death.
- Temporarily depressed valuations: COVID-19 has impacted many businesses negatively, resulting in a drop in earnings and increases in risk/uncertainty causing valuations of many privately held businesses to fall. Assuming these declines in valuations are temporary, transferring the asset while the valuation is low allows for more wealth to be transferred and remain under the exemption, while the appreciated asset is out of the taxpayer’s estate in the future, at a (potentially) much higher valuation.
- Interest rates are low: Business interests and other assets can be transferred to trusts in exchange for promissory notes at a very low rate of interest as required by the IRS.
If you are a business owner and are worried about the changing tax policy landscape and overall economic climate may impact your estate plan, it is prudent to reach out to your estate planning attorney, CPA, business advisor, and a qualified business valuation expert. IF you have further questions on how an administration change will impact your tax situation please contact me at firstname.lastname@example.org.