From 1997 to 2020, the top estate tax rate has declined from 55% to its current 40%. Perhaps the bigger impact has been the significant increase in the estate tax exemption from $600,000 per individual, or $1.2 million per couple, in 1997 to $11.58 million per individual, or $23.16 million per couple, in 2020.
The Presidential election on November 3 juxtaposes two platforms for taxing wealth. President Trump proposes holding the current top tax rate at 40% and making the current estate exemption of $11.58 million per person permanent. Former Vice President Joe Biden proposes a return to 2009 levels: an exemption of $3.5 million per individual and a top tax rate of 45%.
Since the Great Recession of 2008 and 2009, many business owners have seen significant wealth accumulation, and it will be important that these businesses understand how each candidate’s proposal could affect them. For example, the estate of a deceased owner in a private business worth $20 million in 2020 would be able to shelter $11.58 million of the estate from estate taxes. At a 40% tax rate, that would mean total estate taxes of $3,368,000. If the same owner died at a time when 2009 tax rates and limits applied, that same $20 million estate would incur an estate tax of $7,425,000, an increase of over $4 million in taxes. If both spouses are alive today, under current estate tax rules, the entire $20 million business could be sheltered from estate taxes with proper planning. Under 2009 rules, the estate of the second-to-die spouse would incur $5,850,000 taxes.
As a business owner, it is important to know your estate value and determine the best way to handle the assets in your estate. This includes developing strategies for minimizing estate taxes. For closely-held businesses, it will require a qualified business appraisal.
With the national election coming in just a few weeks, and the calendar year end approaching only two months later, there may be little time after the election to make changes should new tax policies be put in place in 2021. We often see existing tax policies grandfathered to the prior year-end. Changes made to your estate plan after 2020 may be impacted by new tax law. For this reason, it may be prudent to get your business appraised before year end in case changes to your estate plan need to be made before December 31, 2020. This may be the perfect time to work with your estate planning advisors and to develop a plan to maximize the value of your estate, regardless of the outcome of the upcoming election.
If you have questions or would like to talk to one of our business appraisers, please contact any one of our Business Valuation professionals at 317-472-2200 or .