Time is ticking on estate planning as we know it. Soon, one of the most favorable planning eras will likely come to an end. Recent months have seen a myriad of tax proposals seeking to eliminate many popular wealth-transfer techniques.
Since March of this year, no fewer than four proposals have been released to modify current gift and estate tax rules. Most recently, on Sept. 12, 2021, the House Ways and Means Committee issued its proposal for the budget reconciliation bill. The draft legislation includes several significant changes affecting high-income and high-net-worth individuals, but from an estate planning perspective, it proposes to:
In addition to the House proposal, three other proposals were released earlier this year. Some of the concepts included in those proposals were incorporated into the House bill but others were not. Notable absent provisions include increasing estate tax rates, capping annual exclusion gifts, limiting the duration of dynastic trusts and eliminating the step-up in basis rule. However, clients should keep these in mind, as they may be revived in the Senate’s version of a budget bill.
Importantly, the House bill is a mere proposal at this point. The situation continues to be fluid, and changes are expected as the bill moves through the legislative process. As a result, the final timing and content of the bill is unknown. The Senate Finance Committee will likely advance its own version of a bill, and both the Senate and the House will need to combine their respective bills to form one comprehensive package.
Despite not knowing what legislation will eventually come to pass, all signs seem to point to significant changes coming. And before they do, taxpayers should immediately look to (1) use their remaining gift and GST tax exemptions, (2) create new grantor trusts, if necessary, and (3) take advantage of valuation discounts for passive assets. Failing to utilize your full gift and GST tax exemptions this year could increase your estate tax bill by approximately $2.3 million ($5.7 million expiring exemption multiplied by 40% estate tax rate).
Ideas for using exemption include:
For married couples reluctant to give away substantial wealth without being able to later access that wealth or the income generated by it, spousal lifetime access trusts (SLATs) can offer a welcome solution. A SLAT is an irrevocable trust created by one spouse for the benefit of the other. The spouse who creates the trust (the “donor spouse”) makes a gift to the trust, using some or all of his or her gift tax exemption, and names his or her spouse (the “beneficiary spouse”) as the initial beneficiary. (Children and grandchildren can also be named as initial beneficiaries, and the beneficiary spouse can alternatively be named as a beneficiary at some time after the trust is created.) Despite the beneficiary spouse’s ability to receive trust distributions, the trust is designed to be excluded from both the donor spouse’s and the beneficiary spouse’s estates.
Current law allows the value of a minority interest in a closely held business to be discounted for gift (and estate) tax purposes. These discounts can be substantial and have the effect of allowing the true gift value to be much higher than the gift tax cost. However, these discounts are in jeopardy of being eliminated under the House proposal. Consider taking advantage of discounts before they go away.
Clients who have outstanding installment notes from prior sales to defective grantor trusts or intra-family loans may consider forgiving some or all of those notes before year-end to use their remaining gift exemptions.
Clients looking to shift wealth to trusts for descendants should create those trusts this year. Not only will this allow clients to use their remaining exemptions, but also it can afford asset protection to the trust beneficiaries for amounts held in trust.
Although not part of the House bill, Sen. Bernie Sanders, I-Vt., proposed to limit the amount of annual exclusion gifts that can be made to trusts to $30,000 annually. Therefore, clients who have existing ILITs with policy premiums exceeding that amount should consider pre-funding those premiums in full this year. In this way, clients can use some or all of their remaining gift tax exemption to fully fund those premiums and avoid future gift tax consequences that may result if Sen. Sanders’ proposal is incorporated into a combined House and Senate package. In addition, since ILITs are grantor trusts, fully funding ILIT premiums in advance would help to avoid estate tax inclusion of ILITs under the proposed House provisions that would include the portion of grantor trusts attributable to contributions made on or after the date the bill is enacted.
Some of these planning opportunities may only be available for a couple more months. Anticipating that, many have rushed to take advantage of the favorable tax laws while they can. As a result, fewer planning professionals have capacity to take on new cases. Time is of the essence.
For more information on this topic, contact our team.
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.