As we prepare for closing out 2020 and anticipate the likely tax changes that will take effect under the new administration, we wanted to bring to your attention the top questions being asked today…

FEDERAL TAXES and the potential decrease in estate lifetime exemption

As you know, the estate lifetime exemption was doubled in 2018 with the passing of the Tax Cuts and Jobs Act. The current year 2020 exemption is at an all-time high of $11,580,000 per person. In 2021 the exemption will be $11,700,000. These all-time high amounts are set to expire at the end of 2025 and drop to one-half of the current level. However, with the new president in office, changes are likely to come sooner than later. Biden has indicated that he wants the lifetime exemption decreased before 2025. If Congress agrees to this reduction in the exemption and it is passed by December 2021, it could be retroactive as of January 2021. If you have thought about using your exemption before 2025, then the time is now; you need to use your large exemption by December 31, 2020.

The IRS has already indicated that there will be no clawback on lifetime gifts. This means that any gifts made under the current exemption will not be subject to estate taxes in the future, even when the exemption is reduced.

Keep in mind that when you gift assets, to make the gift complete, you relinquish ownership, control, and use of those assets. If loss of ownership and control is a concern, certain trusts can be created to alleviate this and provide income for your lifetime.

CALIFORNIA TAXES and the passing of Proposition 19

Proposition 19 allows homeowners 55 and older, disabled persons, and wildfire victims to transfer their low property tax basis to a new property anywhere in the state of California, up to three times.

The most considerable impact of Prop 19 will be seen on parent-child transfers. Under prior law, a parent could transfer his primary residence to his child-free from property tax reassessment. Meaning, the child could inherit parent property and keep the low tax basis for property taxes. Under the new law, effective February 16, 2021, the parent-child transfer will require that the child use the home as their primary residence to receive a $1M exclusion from property tax reassessment. For example, if the residence’s fair market value is $2M, then only the first $1M is excluded from reassessment, the second $1M will be reassessed at fair market value. For any other property (rentals/investments) under Prop 19, the property will be reassessed to fair market value, and property taxes will increase. To take advantage of the transfer of a low property tax basis, parents may want to consider transferring their principal residence (or other real estate where the assessed value is $1M or less) before the February 16, 2021, effective date.

The time is now to act on either of these issues. Please contact us to discuss potential gift and/or sale strategies that are available under current law.