When Will The Iceberg Arrive?
The immediate question—and the justification for this timely if conjecture-filled article—is, “When will this legislation, if enacted, become effective?”

First, here’s a scary observation: The Wall Street Journal published an article on May 27, 2021, revealing that the Biden administration intends to increase the federal capital gains tax to 43.4% … and that this would be retroactive to April 28, 2021.

Can they do that?! The short answer is, yes they can. In 1993, the Clinton administration signed a dramatic increase on income taxes, from 31% to 39.6% for individual taxpayers, on August 3, 1993, that was also retroactive for the entire calendar year. The U.S. Supreme Court later upheld the idea and the tax meter started running for January 1, 1993.

Many proposed tax changes are effective on the date the proposal is reported out of the tax committee—meaning that by the time you hear about the change, it is too late to plan for it.

But if taxes are retroactive, you may not even have until the end of 2021 to get your estate and wealth plans in order.

Today is the first day of the rest of our fiscal lives, and it may make sense to do immediately things that would be helpful in all cases and that might not be permitted later. The planning opportunities discussed here are practical strategies that work today—and are likely to be respected even if the U.S. Congress later enacts some or all of the Biden tax agenda.

Summer Of 2021—Tax Planning At The Beach
The grand strategies listed here can be grouped into categories. The first group of strategies take advantage of low interest rates. The second group deal with pre-empting the Biden tax package—getting it all done before the wrecking ball drops.

Low-Interest-Rate Planning Strategies
1. Loans to Family Members
The current long-term applicable federal interest rate (AFR) is 2.08% compounded annually (as of June 2021). The midterm rate (for loans of three years to nine years) is 1.02% compounded annually. The short-term rate (for loans up to three years) is 0.13%.

These low rates mean you can loan as much as you want, for as long as you want, to children at relatively miniscule interest rates.

2. Grantor Retained Annuity Trusts (GRAT)
The GRAT is interest-rate sensitive and works well in a low-interest-rate environment. The mechanics are as follows:

The grantor transfers assets to a trust, but retains the right to be paid back an annuity equal to the value of the property transferred plus an annual economic return equal to the Internal Revenue Code Section 7520 rate, which is an interest rate (rounded to the nearest two-tenths of 1%) equal to 120% of the midterm AFR.

Note that the 7520 rate is 20% higher than the midterm AFR rate, and this will be a factor in choosing strategies as this discussion progresses.

Under the so-called “Walton GRAT” that runs for a fixed term with annuity payments reverting back to the donor’s estate if the donor dies during the term, the remainder beneficiaries of the trust (for example, the children) are deemed to receive a $0 gift so long as the annuity payable to the donor is equal to the amount contributed plus the 7520 rate.

3. An Intentionally Defective Grantor Trust
An intriguing alternative to a GRAT, with many important similarities and a few key differences, is an installment sale to an intentionally defective grantor trust.

The transaction involves a sale of property that is expected to generate significant cash flow that can then be used to satisfy the installment sale obligations—properties such as stock in a family-owned S corporation or membership interests in a family-owned LLC. These assets can also be eligible for “fragmentation” discounts for those owners who lack control over them or the ability to liquidate or market them.