Changes in taxes on donations, inheritances and transfers by generation leap


According to recent election results, attention has focused on what lies ahead for the federal transfer rights regime. This article discusses the state of current transfer rights laws and President Biden’s proposed changes.

Taxes on inheritance, donations and transfers by generation leap

Three federal taxes affect the transfer of wealth: the gift tax, the inheritance tax and the tax on transfers of generation by jump (TPS). All transfers are not subject to transfer tax. Gift tax (which applies to life transfers) and inheritance tax (which applies to transfers on death) are “unified”, which means that a single scale applies to both. taxes and that there is a single “exemption” amount that each individual can transfer during life or death without paying gift or inheritance tax. The GST is an additional tax imposed on certain transfers made to persons more than one generation below the donor. The GST tax applies to transfers during life and to transfers on death and after death.

Current law

Under the Tax Cuts and Jobs Act (TCJA) of 2017, the gift, estate and GST exemptions were doubled in 2018 from $ 5 million to $ 10 million, indexed to inflation at As of 2011. The 2021 gift, estate and GST exemptions are currently $ 11.7. million. The amount of the exemption is expected to disappear or return to its pre-TCJA level on January 1, 2026. The applicable tax rate for transfers over $ 11,700,000 is 40%.

For married people, the amount of the federal inheritance tax exemption is transferable. This means that if an appropriate election is made in a timely manner on the federal income tax return of the first spouse to die, the surviving spouse can receive and use during their lifetime or upon their death any part of the unused exemption amount of the first spouse. . Thus, if a spouse dies without fully utilizing their federal exemption amount, they are not necessarily lost.

Unlike the federal estate tax exemption, the GST exemption is not transferable between spouses, which means that if one of the spouses dies without fully utilizing their GST exemption, any unused exemption is forfeited.

Biden’s proposals

During his campaign, President Biden released a number of high-level proposals that would nullify much of the TCJA. Although many proposals lacked detail, they included the following:

  • Speed ​​up the “sunset” of increased exemptions before January 1, 2026.

  • Increase the inheritance tax rate to 45%, with exemptions of $ 3.5 million for inheritance tax and GST and an exemption of $ 1 million for gift tax (not indexed to inflation, but the exemption from inheritance tax would be transferable to the surviving spouse). Note that this proposal is somewhat inconsistent with returning exemptions to pre-TCJA levels. It was originally published under the Obama administration in the “Green Book” of Tax Proposals.

  • Tax assets valued at the capital gains rate upon transfer by gift or death (with thresholds, exemptions and other details to be determined).

While the future of the transfer tax system is uncertain, it may be to your advantage to consider wealth transfer strategies now to take advantage of today’s higher exemptions. For a discussion of some of the ways you can use your currently available exemptions, check out our September 2020 Customer Alert.

If any of the proposed legislative changes are passed, the laws could be applied retroactively to an earlier date, possibly as early as January 1, 2021. A retroactive change in the law reducing gift tax exemptions could result in a surprise donation tax for donations made. by taxpayers at a time when exemptions were higher. While commentators have speculated that Congress is unlikely to enact legislation retroactively amending transfer rights laws in 2021, Congress has in the past made some tax law changes retroactively, so that the possibility cannot be completely ruled out.

Retroactivity coverage

Given the possibility of retroactive application of changes to the tax code, certain strategies can be considered immediately to guard against this risk.


Under the tax code, if the recipient of a gift renounces the gift within nine months of the date the gift was made, the gift to that recipient is considered not to have been made. (Note that there are many requirements for an effective disclaimer that are not discussed here.) If a gift was given to an adult child in March 2021, the child would have until December 2021 to decline. gift. The conditions of the donation could be drafted to provide that in the event of non-liability, the good offered goes to the donor and the donation will be deemed never to have taken place. This allows for a postponement of the decision whether or not to use the highest exemption by nine months, when more is known about the changes in tax law.

Matrimonial deduction

For a married couple, the unlimited marital deduction can help mitigate the risk that changes in the law may be retroactive. For example, a spouse could transfer assets to a trust that could contain a taxable gift or could be considered a qualifying interim interest property trust (QAPT) for the benefit of the other spouse. The choice of QTIP could be postponed until the moment when a declaration of donations for such an operation is due, that is to say in October 2022 (with an extension).

If the exemptions are reduced in 2021 and made retroactive, a QPIP election could be made, thus qualifying the donation for the marriage deduction and not resulting in tax on the donations. The QTIP trust could also provide for a “best interest” standard for distributions that will allow easy access to assets.

Alternatively, if the exemptions are not reduced, the donor spouse could choose not to make an election under the QPIP and the trust could proceed as a gift trust so that the recipient spouse uses the higher exemption. In addition, such a trust could be drafted to provide that a waiver by the beneficiary spouse of all of his or her interests in the trust would result in the holding of the assets offered in a descendant trust (this trust could also include the spouse as a beneficiary). These options allow flexibility to deal with possible changes in the law within nine months of the donation, including the full settlement of the donation or the use of the highest exemption.

Loans / Pardon

An intra-family loan can also be used to facilitate the transfer of assets now. Interest rates remain very low. For example, the mid-term AFR rate for February 2021 is 0.562%. Rather, the proposed grant could be in the form of a loan, which could be canceled, becoming a grant if the exemption remains at current levels, or extending as a loan if the exemption is reduced retroactively.

© 2021 Faegre Drinker Biddle & Reath LLP. All rights reserved.Revue nationale de droit, volume XI, number 53


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