Estate planning transfer tax changes on the horizon


The big question in the estate planning world today is whether, when, and to what extent Congress will pass changes to gift, inheritance and income tax laws. With many challenges facing the new Biden administration and the narrowly Democratic Senate, major tax legislation may not even be considered in 2021. Nonetheless, the tax proposals approved by the Biden administration provide clear signals for actions that customers should consider this year.


  • The moment of the giveaway is 2021, change is on the horizon.

  • The timing and extent of potential changes to gift and inheritance tax laws is unclear.

  • Some potential changes include: reducing the exemption, increasing the estate tax rate, increasing the capital gains tax rate, and eliminating the base adjustment.

  • Consider “locking in” the $ 11.7 million exemption by donating to irrevocable trusts and continuing to take advantage of low interest rates to withdraw appreciation from your estate using techniques such as: than FREE and intra-family loans.

  • Retroactive changes are unlikely; Expect the changes to take effect on January 1, 2022 at the earliest.

Potential tax legislative changes with the greatest impact on wealth transfer

During the campaign, President Joseph Biden proposed reducing the current amount of the exemption from $ 11.7 million to $ 3.5 million per person and increasing the estate tax rate from 40% to 45% on amounts exceeding the exemption. Lowering the exemption to $ 3.5 million is ambitious in itself, given the need for support from moderate Democrats with large Republican bases. Instead, Congress could simply revert to $ 5 million, adjusted for inflation, which was the exemption amount before the substantial increase enacted under the Tax Cuts and Jobs Act of 2017 ( TCJA).

For what it’s worth, the exemption has never been lowered. Despite this, the doubling of the exemption under the TCJA was a radical departure from previous policies. Thus, reducing the exemption to $ 5 million, corrected for inflation, seems easier to accept. In other words, Congress can choose to treat the past four years as fluke and get back to “normal.”

The Biden team also signaled during the campaign that they would call for the repeal of the base death markup and tax the capital gains as ordinary income. Although the base increase is a concept in tax planning, it is also an important element in the planning of transfer taxes. Under current law, donations of low value assets can be detrimental because the donee receives the donor’s base. Taxpayers often decide to keep certain low base assets, rather than selling or giving them away, to get the base markup on death. Family members or trusts that receive these assets can then sell those assets with little or no capital gains tax.

The Biden campaign had proposed removing this basic adjustment. Another proposal is to treat the transfer of property appreciated on death or by donation as a taxable event leading to recognition of the gain, but commentators believe this is unlikely.

Biden’s campaign proposal to tax long-term capital gains and eligible dividends as ordinary income on all income over $ 1 million would further exacerbate the impact of a repeal of the base increase . It is also possible that Congress will increase the current highest regular tax rate from 37% to 39.6%.

Planning for the coming year

This year is your chance to make the most of your inheritance and gift tax exemption and the low interest rate environment.

“Block” the exemption from inheritance and gift tax

Many high net worth individuals have used most, if not all, of their exemption. Under current tax laws, in 2021 individuals can donate up to $ 11.7 million over their lifetime ($ 23.4 million for married couples). If the exemption goes from $ 11.7 million to $ 3.5 million and the inheritance tax rate goes from 40% to 45%, the cost of inaction is almost $ 3.7 million. dollars (if an individual donates $ 11.7 million while the exemption is $ 3.5 million and donations in excess of the exemption are taxed at a rate of 45 percent, the The resulting gift tax is approximately $ 3.7 million; $ 7.4 million for married couples). If individuals and married couples have not used their exemption (s) and can afford it, they should seriously consider donating equal to their remaining exemption (s) in 2021. , ideally to a trust that skips a generation for the benefit of their descendants. .

Depending on your and your family’s goals, circumstances, remaining exemption, and cash flow needs, it may not be possible to give up to $ 23.4 million or even $ 11.7 million. dollars, to a trust for your beneficiaries. A long-accepted way to address this concern is to create a trust that benefits both the spouse and the descendants of the settlor. These are commonly referred to as Spousal Lifetime Access Trusts (SLATs). An SLAT is a simple and effective way to meet the possible need of the older generation to access transferred property – it provides direct access for the beneficiary spouse and indirect access for a settlor spouse. Provisions relating to the grantor’s trust, such as those allowing the grantor of the trust to exchange assets or take out loans from the trust, provide tax flexibility and access to funds by loan.

SLATs have become so popular that couples have created trusts for each other. This is not without risk and should only be done with different trust arrangements and with the creation of separate trusts over time. Finally, it’s important to remember that potential estate tax savings should never be the sole determining factor in your financial planning decisions. People who have stretched out to give important gifts sometimes have deep “gift remorse”. So, give gifts if you can, but, more importantly, do them if you are comfortable doing so.

Domain size freeze

Perhaps you and your spouse have already used your exemptions and are looking for ways to further reduce the tax burden on your estate, or you are not ready to make large transfers of your property. Either way, a great alternative is to freeze the growth of your estate with strategies such as Grantor Retained Annuity Trusts (Libres) and installment sales with family trusts or loans. FREEs and installment sales thrived in a low interest rate environment (as we mentioned earlier) as the value of assets often rose at a rate greater than the annuity rate, in the case of FREEs. , or at the interest rate on a note. Thus, these strategies essentially “freeze” the size of the estate and transfer significant capital gain, which would otherwise have remained in the client’s estate, out of his estate.

Uncertainty does not prevent planning

It is absolutely within the power of Congress to pass retroactive tax legislation if it is rationally linked to a legislative objective, but as a practical matter Congress generally avoids doing so. It is almost always unpopular and only adds nominal additional income for budget purposes. Biden administration officials have previously said they are unwilling to seek retroactive tax changes.

Given the low probability, the threat of retroactive changes in tax law should not prevent clients from implementing new estate planning strategies. For those who remain concerned, a number of strategies can be structured to limit potential gift tax in the unlikely event that legislative changes are adopted retroactively. In 2021, customers should consider reviewing their existing plan to determine if they can use certain strategies to maximize the use of their exemption and meet their planning goals.


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