Three Estate Planning Suggestions to Watch Out For | Schwabe, Williamson and Wyatt PC


House Democrats recently released additional legislative proposals that, if passed, would affect several commonly used estate planning techniques. Of these proposals, three would have a significant impact on some of the most common wealth transfer strategies. It’s too early to tell if this legislation has a chance of being passed, but clients who plan to use strategies that would be affected by these changes should carefully monitor future developments.

The proposed changes include:

  • Reduced federal inheritance tax exemption. The bill would halve the current exemption. The current federal exemption is based on a $ 5 million exemption in 2010 dollars. In 2017, the exemption was temporarily doubled until the end of 2025. The proposed legislation would cause the increased exemption to expire. at the end of 2021, instead of 2025. The 2021 exemption is $ 11.7M, half of which would be $ 5.85M. This amount could increase a bit in 2022 due to adjustments for inflation. If this proposal becomes law, the potential drop in the exemption could be a reason to consider making large donations before the end of the year.
  • Changes to the grantor’s trust rules. Under current law, it is possible to create irrevocable trusts that are treated as transferor trusts for income tax purposes, but not for estate tax purposes. These trusts, sometimes referred to as “intentionally faulty transferor trusts”, can be very beneficial in certain situations and are commonly used for donations. The assets of these trusts are not included in the settlor’s taxable estate for estate tax purposes. However, since the person who creates the trust is considered the settlor for income tax purposes, that person can continue to pay taxes on the assets of the trust. The payment of trust tax by the settlor is essentially an annual donation to the trust that is not treated as a donation for donation tax purposes, so the payment no longer uses the estate. of the grantor and exemption from tax on donations. The settlor’s payment of the trust’s taxes allows the trust to grow without diminishing it due to the payment of taxes. It is also possible for the settlor to sell low value assets to these trusts without recognizing a gain. The proposed legislation would ensure that trusts that are treated as transferor trusts for income tax purposes would be included in the transferor’s estate for inheritance tax purposes and would also require the grantor to account for the amount. gain on assets sold to this type of trust. If this proposal becomes law, it would eliminate the estate planning strategies currently used with these trusts. The proposal would make these rules effective for trusts created and transfers made after the date of enactment of the law. Clients who plan to create intentionally defective transferor trusts or sell assets to such trusts may wish to complete these transactions as soon as possible.
  • Discount limits available for non-commercial assets. Under current law, valuation rebates are available for inheritance and gift tax purposes when transferring closely held business interests. These discounts are typically applied to the entire business entity, including the part of the entity that is made up of non-business assets such as excess cash, marketable securities, and real estate investments. The proposed legislation would eliminate discounts on passive assets that are not used in the active conduct of a trade or business. If this proposal becomes law, it would reduce the total discounts available for transfers from small family entities, such as limited liability companies and partnerships, that hold passive assets. This proposal would apply to transfers after the date of entry into force of the law. Clients planning to donate from private businesses that hold passive assets may consider completing the donations as soon as possible.

At this point, these are only proposals and there is no certainty as to whether these proposals will become law, or if so, in what form. In reviewing these proposals, it is interesting to note previous proposals that were not included. More specifically, this proposal does not include the reduction of the exemption to $ 3.5 million, does not modify the rules for recognizing assets held at death, does not decouple the exemptions from inheritance and gift tax. , does not reduce the gift tax exemption to $ 1 million, and does not contain retroactive inheritance tax changes. It is too early to know for sure, but it is possible that the absence of these changes in the current proposals could give an indication that these changes may not go forward.

It is not known whether these proposals will eventually become law, but clients who plan to use these strategies should carefully monitor future developments and may consider entering into pending transactions to take advantage of the current law and minimize the risk that changes in the law will affect their plans.


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