The blue storm is now on the horizon with the Democratic control in both Congressional houses. The actual timing and extent of any income tax and estate tax legislation is still uncertain, and there still may be time to take advantage of planning opportunities before changes are enacted.

We expect more income tax breaks for the lower income earners who spend all their dollars to help economic recovery and increased rates on the high-income earners to replenish our government coffers depleted by the pandemic. Changes to the estate tax rules that impact the ultra-high-net-worth individuals may also come, but I understand that the revenue increased by estate tax changes is dwarfed by any income tax changes and hence a lower priority for Congress to change. Note that income and estate tax planning must address the possibility that Congress can enact retroactive tax law changes, but normally changes become effective on the date enacted by Congress or the beginning of the next calendar year.  Sweeping changes have been proposed by Biden’s administration and now it is just a matter of when and how much. 

The current gift, estate and generating skipping tax (GST) exemption amount is $11,700,000 per individual. This exemption amount is currently required under the law to be cut by 50% in 2026, to about $6M per person depending on the inflation adjustments. This reduction is under the law, and it has created a use-it or lose-it opportunity for high-net-worth individuals. However, the following Biden campaign proposals are much more dramatic and may change the estate tax rules this year or next:

• Reduce the estate and GST exemption to $3,500,000, and only permit $1M in tax-free lifetime gifts.
• Increase the estate tax rates significantly from 40% to unknown percentages.
• Eliminate the stepped-up basis rules at death. This would be a massive change and a carryover basis may create an income tax at death or later sale on all appreciated property – details unknown.
• Limit valuation discounts between family members.
• Include grantor trusts in the grantor’s estate, and eliminate use of short-term grantor retained annuity trusts (GRATs).
• Limit duration of GST Trusts.

The above proposals make it urgent to address your estate tax planning now versus in the future. Addressing your estate and succession planning now is always best, but it is not easy to find the time and make a lot of tough decisions. High-net-worth parents always stress over gifts and whether trusts should be established and what kind, with concerns about diminishing their children’s incentive to fully develop themselves.

Estate planning is a process, not a one-time trust agreement, and as you become more educated in the process through your trusted advisors including your attorney, accountant, wealth and insurance advisors, your ability to make the decisions will become easier.

Some estate and gift opportunities to consider under current law:

• Use your annual exclusion gifts of up to $15,000 per person, $30,000 if both parents make gifts to that person. Over time, these gifts accumulate into significant amounts. Direct payments to a provider for medical services or educational tuition for anyone, related or not, are not considered gifts.

Make large gifts of assets with depressed values and subject to discounts. Leverage the current $11,700,000 unified credit amount with gifts of fractional interests in real property and/or ownership interests in a family or closely-held business that qualify for valuation discounts.  To protect against retroactive changes to the $11.7M gift exemption amount planners need to consider use of disclaimers, formula gifts, and/or use of life-time qualified terminal interest property (QTIP) trust elections, as part of the planning with trusts.

Make low-interest loans to children. Loans for homes or business opportunities are very attractive, with January 2021’s Applicable Federal Rates (AFRs) at .14% for loans three years or less, .52% for loans more than three years and not more than nine years, and 1.35% for loans more than nine years.

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