Advice in estate planning – Proposal of ways and means of the house – Family and matrimonial


United States: Advice in estate planning – Proposal of the ways and means of the house

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The House Ways and Means Committee recently proposed sweeping changes to the tax code that would significantly undermine basic wealth transfer planning techniques. We recommend that you consider taking action now.

  • Decrease in transfer tax exemption amounts: Under current law, the unified federal exemption amount for inheritance, gift and generational transfer tax is $ 11.7 million and is expected to decrease to $ 5 million, adjusted for inflation, January 1, 2026. According to the proposal, the effective date of this decrease would be accelerated until January 1, 2022 and the inflation adjusted exemption amount should be approximately $ 6,020,000. Any excess exemption not used before January 1, 2022 will be forfeited.
  • Eliminate the benefits of transferor trusts: The proposal would destroy the benefits of settlor trusts created after the effective date, such as life insurance trusts (ILITs), FREEs (annuity trusts kept by the settlor), QPRTs (life insurance trusts). Qualified Personal Residence) and SLATs (Spousal Life Access Trusts), as well as seriously erode the benefits of transferor trusts established prior to the effective date.

    Under current law, a “transferor trust” is a trust in which the creator of the trust (the “grantor”) is treated as the owner of the assets of the trust for income tax purposes. This is a useful estate planning tool because (i) the assets of the trust and any capital gains thereon are not taxable in the settlor’s estate, (ii) the assets of the trust grow over time. Income tax free since the settlor pays the income tax attributable to the assets of the trust, (iii) the payment by the settlor of this income tax is not subject to tax on donations, which is equivalent to a tax-free donation, (iv) the settlor’s taxable wealth is reduced by his payment of that income tax and (v) transactions between a settlor and his settlor trust are not are not realization events for income tax purposes.

    The proposal would change the treatment of transferor trusts as follows:

    • The assets of the trust would be subject to estate tax on the death of the settlor.
    • A distribution to a beneficiary (other than the settlor or his or her spouse) during the settlor’s life would be considered a donation from the settlor for donation tax purposes.
    • If the trust ceases to be a transferor trust during the life of the transferor, it will be treated as a gift for gift tax purposes.
    • Transfers between a settlor and its irrevocable settlor trust would no longer be ignored for income tax purposes. For example, the sale by a settlor of an appraised asset to his trust, or the use by a FREE of an appraised asset to satisfy an annuity payment owed to the settlor, would result in capital gains for the settlor, and Interest payments on a note owed to a grantor from its trust share would be taxable income for the grantor.

This new tax treatment of transferor trusts would apply to transferor trusts created after the date of passage of the proposal, that is, the day the new law is signed by President Biden. It is important to note that this would also apply to the part of any trust created before the enactment date that is attributable to a contribution made on or after the enactment date. Accordingly, a transaction between a settlor and its settlor trust occurring after the promulgation date (such as, for example, the payment of a premium paid by the settlor on a life insurance policy held by its ILIT), would render the trust partially included in the settlor’s estate. More worryingly, there have been unofficial indications that the proposal’s effective date will be retroactive to September 13, 2021, the date the proposal was introduced rather than the date the proposal was adopted.

  • Elimination of evaluation discounts: Under the proposal, valuation discounts for lack of control or lack of negotiability would no longer be available when transferring a partial interest in a family LLC (limited liability company) or an FLP (family limited partnership ) who does not carry on a trade or business activity.

It is not known which of these provisions, if any, will be enacted into law. What is clear is that, if passed, the proposal will dramatically increase the transfer tax burden for wealthy families and limit the tools we have used for decades to plan accordingly. However, by engaging in proactive planning now, you may still be able to benefit from the current law, which is considerably more favorable.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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