Critical Estate Tax Changes Could be on the Horizon

Anyone with an estate of at least $3.5 million should get in line now to confer with an estate planning advisor because advisors everywhere are already busy dealing with proposed changes to the estate and gift tax laws.

American Families Plan

President Biden announced his American Families Plan on April 28, 2021 and while definitive details have not been forthcoming, the White House did release a general fact sheet outlining the various proposals by the Administration.

99.5% and Sensible Taxation and Equity Promotion (STEP) Acts

There have also been two other cornerstone pieces of legislation introduced in Congress this year (among others) – the For The 99.5% Act by Senator Sanders and the Sensible Taxation and Equity Promotion (STEP) Act by Senator Van Hollen.

Any or all of these proposals could have dramatic effects on the taxation of estates and trusts as well as how wealth might be transferred in the future. The potential for passage of some of this legislation may seem remote, but there are many similarities to legislation proposed year after year by former President Obama’s administration and the political landscape in Washington DC now is ripe for some form of passage.

Further, the federal government’s fiscal year-end is September 30th and another reconciliation bill could be introduced soon thereafter that could avoid any Senate filibuster attempts to thwart passage of any new tax legislation.

While we don’t know what the changes to tax laws will be exactly, we do believe it is very likely for there to be changes to some degree. In addition, while we don’t know when these changes will take effect, we do know some effective dates in the proposals are set to January 1, 2022 and some are set to the effective date of the legislation (when it is passed).

Moreover, believe it or not, some are set retroactively to January 1, 2021. Although it is not too late to implement planning, waiting should not be an option.

Proposed Changes

Here are some of the more impactful changes being proposed:

  • Estate tax lifetime exemption amount could be reduced to $3.5 million ($7 million for a married couple) instead of the current level of $11.7 million per person. This presents a use-it-or-lose-it proposition for estate planning before any change takes effect.
  • Gift tax lifetime exemption amount could be reduced to $1 million from $11.7 million. Anyone contemplating future gifts to heirs of greater than $1 million should consider accelerating those gifts.
  • Estate tax rate could increase from a current flat rate of 40% to a progressive rate structure starting at 45% and extending to 65% on everything over $1 billion.
  • Discounts for lack of marketability and minority interest could be eliminated for many family-owned ventures. Anyone with substantial business interests that require succession planning may need valuations now to avoid the loss of these valuable discounts when transferring wealth.
  • Future (non-grandfathered) irrevocable grantor-type trusts could be subject to estate tax on the death of the grantor as trust assets would be included in the grantor’s estate. This could be bothersome even for the mass affluent who have established life insurance trusts. Everyone with substantial life insurance policies should consider establishing an irrevocable life insurance trust now and fund it with assets to pay future premiums. Those that are considering a sale to an intentionally defective grantor trust (IDGT) as a strategy of wealth transfer should accelerate that decision.
  • Step-up in basis at death could apply under the For The 99.5% Act but not under the STEP Act or the Biden proposal. If the latter legislation takes effect, individuals could pay income tax while they are accumulating wealth and their estates could be strapped with income tax on the unrealized capital gains above $1 million of the wealth they are passing on (a similar taxation event could occur on lifetime gifts or on distributions from a trust) even before any sale. Items left to charity or a surviving spouse would be exempt. Charitable trust planning could be the new centerpiece of your estate plan if you are philanthropic.
  • Grantor Retained Annuity Trusts (GRATs) could become prohibitive as the proposed legislation would require a 10-year minimum term and a minimum gift on the funding of the GRAT that would be at least equal to the greater of 25% of the fair market value of the property placed in the GRAT or $500,000. The “zeroed out GRAT,” popular for not using any exemption, might not be a wealth transfer option in the future.
  • Generation-Skipping Transfer (GST) tax lifetime exemption could be reduced to $3.5 million from $11.7 million, and GST tax-exempt status could be limited to 50 years. This could also be applicable to GST tax trusts currently in existence by limiting their GST tax-exempt status to the next 50 years after enactment. This would drastically affect dynasty trust planning and asset protection planning for future generations.
  • The current $15,000 per donee (to an unlimited number of donees) gift tax annual exclusion could be limited to $10,000 per donee and then only $20,000 per donor for certain types of transfers, such as transfers to a trust.

While it is our hope that none of these proposed laws will be enacted, it is best to “plan for the worst and hope for the best,” given the unpredictable political climate and the dramatic changes that could be made even if watered-down versions of this proposed legislation pass. Estate planning is important no matter your current level of wealth. SVA’s Trust and Estate team would be happy to assist you in implementing an appropriate estate plan before it is too late.

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Biz Tip Topic Expert: Richard Kollauf - JD, CPA, CFP, AEP

Richard is a Principal for SVA Certified Public Accountants and has more than 35 years of experience working in financial, accounting, and legal operations. Richard’s expertise in the multi-faceted financial environment includes business succession planning, tax, investments, finance, mergers and acquisitions, estate planning, and trust administration. He also has experience in estate planning and distribution for complex operational and investment multi-state businesses. Richard provides income tax consulting services to closely-held and family-owned businesses, as well as high net worth individuals.

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