Estate tax planning in 2021: uncertainty abounds, but options still exist – Tax


Currently, US citizens and non-US citizens domiciled in the United States are entitled to an exemption from gift and inheritance tax of $ 11.7 million and are subject to a marginal tax rate on gifts and maximum successions of 40%. And while the gift and inheritance tax exemption is expected to drop to around half of the current amount on January 1, 2026, there are also tax proposals at stake that could change inheritance tax laws. and donations much earlier.

What are the proposals?

During the election campaign, then-candidate Biden expressed a desire to reduce the gift and inheritance tax exemption from $ 11.7 million to $ 3.5 million and increase the tax rate on donations and inheritances from 40% to 45%. The Build Back Better Act (BBBA) reconciliation bill currently in Congress would speed up the sunset until 2022. According to the BBBA, the exemption would be around $ 6 million. The Green Paper, recently released by the Treasury, reveals that the Biden administration would also like to dramatically increase the types of transfers that would trigger capital gains for income tax purposes (potentially at higher capital gains rates). proposed).

Related Reading: Debate Continues in Congress on Proposed Tax Changes

The extended category of transfers would include:

  • Gifts;
  • Death;
  • Transfers or distributions from trusts;
  • Contributions or distributions from partnerships; and
  • Deemed dispositions resulting from holding assets for 90 years in a partnership or trust.

Since these types of transfers are widely used in current estate planning practices, the Biden proposals, along with additional bills that have been presented to Congress, would significantly alter the current estate planning environment. Some of the proposed bills recommend retroactive adoption of changes to tax legislation. While this is not normally done, Congress has the power to make retroactive changes to tax law.

What can you do now?

In 2020, many high net worth taxpayers are planning to take advantage of current gift and inheritance tax laws, anticipating the possibility that substantial changes will occur as early as January 1, 2021 and that the changes will impact on their ability to do meaningful planning for the future. Now, the potential risk facing taxpayers who have yet to implement such planning is whether new tax laws will be enacted retroactively, turning what would have been a tax-free gift into a taxable gift.

For example, a taxpayer is considering a donation of $ 11.7 million on January 1, 2022. Then, the gift and inheritance tax exemption is lowered from $ 11.7 million to $ 6 million with the gift and inheritance tax rate increased from 40% to 45%. all effective January 1, 2022. What was considered a non-taxable donation on December 31, 2021 now becomes a taxable donation and results in a donation tax of $ 2,565,000. Taxpayers who are now considering substantial donations or similar planning should act as soon as possible while carefully considering the possibility of retroactive changes in tax laws.

Gifts to the next generation – in trust or simply

For taxpayers willing to engage in estate planning, one planning technique is to donate to trusts for the benefit of children and grandchildren. Under current rules, a married couple who have not made any prior taxable donation can transfer up to $ 23.4 million without incurring donation tax. The gift often consists of cash, marketable securities or restricted business interests. A donation of restricted business interests typically results in appraisal discounts for lack of control and lack of market value, as determined by an appraisal. Please note that the BBBA is also proposing to eliminate valuation discounts on donations of non-commercial assets. Alternatively, individuals can make an outright gift for their child who has reached the age of majority. However, legal counsel often recommends donating to a trust, as a trust can offer creditor protection, divorce protection, and future gift, inheritance, and generation tax protection.

Spousal Lifetime Access Trust

Some taxpayers are uncomfortable transferring large sums to trusts for their children or worry about losing control over assets altogether. In response to these concerns, a “Spousal Lifetime Access Trust” (SLAT) may be appropriate. A SLAT is created when a spouse (the donor spouse) funds an irrevocable trust for the benefit of the other spouse (the donee spouse). Normally, the donee spouse, children and grandchildren are designated as discretionary beneficiaries of the SLAT, with the trustee making distributions to the donee spouse, as it deems appropriate.

Related Reading: Spousal Lifetime Access Trust: A Creditor Protection and Estate Planning Tool

A SLAT will generally be a grantor trust for income tax purposes, requiring the donor spouse to pay tax on the income earned by the trust. Assets held jointly by both spouses cannot be used to fund an SLAT. Careful drafting of the trust is necessary to minimize the problems that can arise if the recipient spouse dies or if the spouses divorce. When a husband sets up an SLAT for his wife and children and the wife sets up an SLAT for her husband and children, the terms of the two SLATs should not be the same to avoid the “doctrine of reciprocal trust. “. If the trusts go against this doctrine, the trusts are essentially unraveled, undoing the planned planning.

Settlor’s retained annuity trust

Another estate planning technique commonly used by high net worth individuals is the “Grantor Retained Annuity Trust” (FREE). Gifts to a FREE are designed to use little or no use of the estate tax exemption and the individual’s lifetime gifts. Instead, the goal of a FREE is to transfer future income and asset appreciation from the trust to the next generation. The Gratuit works best if the individual owns assets that are expected to grow in value above what’s known as the Section 7520 rate, which is set each month by the IRS. The rate for July 2021 was 1.2%.

For example, suppose a FREE was created with $ 10 million in assets in July 2021 for a five-year term and is expected to earn 8% over the five-year term. According to this factual model, approximately $ 2.5 million would be transferred tax-free to the next generation or to a trust for the next generation, using little or no tax exemption on gifts and donations. estates of the individual. Taxpayers should consider implementing a FREE – especially under current tax law – if their goal is to transfer assets to the next generation.

Given the uncertainty of whether and when any tax changes will be enacted, people who have not recently updated their estate plans should consult their tax and estate advisor as soon as possible. Your ORBA advisor can assist you in the assessment and evaluation of your family goals and objectives in terms of estate succession and create an estate plan that takes into account current and future risks, whether legislative, financial or other.

Related Reading: Strike While Interest Rates Are Low

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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