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With change looming, is 2021 the peak of wealth planning? Take advantage now before it is too late

Key takeaways

With proposals from the House Ways and Means Committee on Sept. 13, 2021, it continues to look like one of the most favorable planning eras will come to a close. Including other recent possible changes discussed by President Biden and other elected officials, the following could come to fruition shortly:

  • Significantly reduce the current gift, estate and generation-skipping transfer (GST) tax exemptions;
  • Eliminate commonly used wealth planning techniques such as grantor trusts, grantor retained annuity trusts (GRATs) and valuation discounts, to name a few; and
  • Eliminate the ability to step-up assets in your estate to fair market value at death.

Interest rates that make certain estate planning techniques particularly favorable are expected to remain low for the remainder of 2021, but are expected to rise in 2022.

If you’re like many, the pandemic has afforded you time to think, reassess and reevaluate your goals and objectives. Perhaps, you’ve even come to realize that your priorities have changed, that your ideas about your legacy are different now. If so, there is likely no better time to plan than today. The political landscape changed significantly in 2021, and with that change will likely come major revisions to our tax laws. The proposed revisions will make transferring wealth much more difficult, so take advantage now before it’s too late.

Take advantage of historically high federal tax exemptions

The ability to make tax-free gifts has never been better. That’s because the federal gift, estate and GST tax exemptions are at historical highs. In 2021, those exemptions are $11.7 million per person. For married couples, that amount is $23.4 million. This means that individuals and married couples can make gifts up to these amounts without paying a gift tax.

These high exemption levels will not last forever. Current law has them set to lower to $5 million per person (plus indexing) in 2026. This will result in gift and estate tax exemptions of roughly $6 million per person, about $5.7 million lower than today. And a number of different proposals from the Biden administration and other elected officials could cause the reduction to come much sooner and potentially end up much lower. In fact, the House Ways and Means Committee proposal has these higher amounts expiring Dec. 31, 2021.

Thus, if you are contemplating shifting wealth, now is the time to start. Odds are that practitioners who can assist you with this process — identifying the right assets to give away, updating your estate plan, carrying out the transfer of assets — will get even busier as the year draws to a close. Starting now could be critical to finalizing your plan before changes occur.

Choose from the variety of wealth planning techniques at your disposal

When it comes to wealth transfer planning, there is no one-size-fits-all approach. Most clients will rely on a combination of strategies. Fortunately, under current law, you have as many techniques at your disposal as ever before. This could change, however, depending on which version of the proposed legislation is eventually adopted. Some of these strategies could be eliminated or made less effective, but as of now, techniques to consider include the following:

  • Spousal lifetime access trusts (SLATs)
  • Grantor retained annuity trusts (GRATs)
  • Installment sales to intentionally defective grantor trusts
  • Charitable remainder trusts (CRTs)
  • Charitable lead trusts (CLTs)
  • Family limited partnerships (FLPs) or family limited liability companies (FLLCs)

Benefit from low interest rates

While not at their historical low points, the interest rates required to be used by the Internal Revenue Service for many of the planning techniques above continue to remain low. This is to your significant benefit, as techniques implemented now will likely perform much better than those implemented in higher-rate environments. While it is difficult to predict exactly how long favorable rates will last, the Federal Reserve has hinted throughout 2021 about increased rates in 2022.

Identify assets with values currently lower than pre-pandemic levels

With the pandemic came volatility. While the stock market and many assets have rebounded — and appreciated significantly in value — other assets have lost value. If you are contemplating making a gift, give strong consideration to those assets that have decreased in value — and are likely to recover in value — so as to maximize the leverage of your gift tax exemption.

Leverage your gifting with discounts

A critical element of this planning involves determining the fair market value of your assets. In valuing a closely held business or an interest in an FLP, for example, discounts are often applied where the owner lacks control (minority interest discount) and/or when there is not a ready market in which to sell the interest (lack-of-marketability discount). These discounts can be significant, thereby allowing you to use less of your gift tax exemption. However, as mentioned above, recent tax proposals could eliminate these discounts or reduce them in amount. In the current House bill, the use of valuation discounts in the transfer of certain nonbusiness assets are disallowed for estate and gift tax purposes.

The power of grantor trusts might go away

Another popular planning technique currently allows you to establish an irrevocable grantor trust. Provided the trust meets certain requirements of the Internal Revenue Code, assets you contribute to the trust are treated as yours for income tax purposes, but not for gift or estate tax purposes. This means that you pay taxes on any income earned by the grantor trust as you would if you held it personally, but you are effectively able to reduce the size of your estate, without tax implications from the transfer of assets. This allows the assets in the trust to grow and compound unabated. Once again, these benefits may not last for long given recent tax proposals; a current proposed House bill would require estates to include assets owned in a grantor trust at death for trusts created after the date of enactment and for transfers to grantor trusts after enactment. Thus, it may be prudent to take advantage now in hopes of being grandfathered in any new legislation, which is likely to be effective immediately.

Step-up in basis may be going away

One of the more impactful tax benefits occurs at your death, when the cost basis of property you own is adjusted to the fair market value on the date of death. If property has appreciated, this step-up in basis eliminates any built-in gain and allows your heirs to immediately sell that property, should they choose to do so, without paying any income taxes.

The proposed Sensible Taxation and Equity Promotion (STEP) Act would eliminate the step-up in basis at death for gains exceeding $1 million. This would fundamentally change estate planning and the general practice of holding onto certain highly appreciated assets until death.

Changes to current income tax rates

Based on recent proposals, it also seems that higher income tax rates are likely. Among the potential changes is the possibility that the 3% surcharge for modified adjusted gross income above $100,000 will apply to trusts and estates.

Act now!

At Baker Tilly, we know the time is now for wealth planning as the likelihood is high that we may lose some planning options. If you have questions about a particular technique or need help with how to move forward, please reach out to a Baker Tilly professional to get started today.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Baker Tilly Wealth Management, LLC (BTWM) is a registered investment advisor. BTWM does not provide tax or legal advice. BTWM is not an attorney. Estate planning can involve a complex web of tax rules and regulations. Consider consulting a tax or legal professional about your particular circumstances before implementing any tax or legal strategy. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Securities, when offered, and transaction advisory services are offered through Baker Tilly Capital, LLC, Member FINRA and SIPC; Office of Supervisory Jurisdiction located at 4807 Innovate Ln., Madison, WI 53718; phone: +1 (800) 362 7301. Baker Tilly Wealth Management, LLC and Baker Tilly Capital, LLC are wholly owned subsidiaries of Baker Tilly US, LLP. Baker Tilly US, LLP, is an independently owned and managed member of Baker Tilly International. © 2021 Baker Tilly Wealth Management, LLC

Kelly Baumbach
Executive Managing Director, CFP®, CEPA
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