Two current tax proposals target key points of most wealthy clients’ estate plans. One’s getting all the headlines, but the other should get more attention.
The first focuses on whether a taxpayer who uses their $11.7 million federal exemption from gift and estate tax this year can keep that amount if he or she dies after this exemption drops to pre-2017 levels. That drop could come either through proposed legislation soon or in 2026, the sunset year under the Tax Cuts and Jobs Act.
“A prior regulation released by Treasury shielded taxpayers from such clawbacks, but Treasury reserved the ability to issue additional guidance regarding certain gift transactions seen as abusive. It seems that Treasury is now looking to issue such additional guidance,” said Tara Thompson Popernik, director of research at Bernstein Private Wealth Management in New York.
The IRS has said there will be no clawback but hasn’t closed the door on the possibility. Still, “the effect of a potential clawback should be quite limited,” said Neil V. Carbone, partner at Farrell Fritz, P.C., in New York.
“Many of our clients are aware of the potential changes in the federal exemption amount,” Popernik said, “but fewer are aware of the potential impact of the grantor trust rule changes.”
The second issue is whether grantor trust status, which currently only pertains to the income tax treatment of a trust, will be expanded to impact the estate tax treatment, too. “As many trusts created today are structured as grantor trusts, this change has the potential for significant impact,” Popernik said.
This proposed legislation would affect trusts created on or after the date of enactment but could also apply to contributions to an existing trust made on or after that date as well, said Karen L. Goldberg, principal-in-charge in the Trusts and Estates Group at EisnerAmper in New York.
Proposed rules regarding intentionally defective grantor trusts, which include treating distributions as gifts, “does more than close down life insurance trusts,” Goldberg said. Grantor retained annuity trusts (GRATs) will no longer be viable because “even if they are successful, any GRAT property remaining when the trust terminates will be subject to gift tax. Sales to defective grantor trusts also won’t work ... because the trust [can be included] in the grantor’s estate,” she said, adding that spousal lifetime access trusts could also be affected.
“Some estate planning attorneys feel that Congress hasn’t considered all of the unintended consequences of these provisions,” said Chuck Zuzak, director of financial planning in the Pittsburgh office of JFS Wealth Advisors of Hermitage, Pa.
Time’s running out, but planning is still possible.
Clients have been considering using their increased lifetime exemptions before they’re reduced, which is expected to happen by Jan. 1. “Other clients are either funding existing grantor trusts or creating and funding new grantor trusts before the enactment date,” Carbone said, adding that clients who’ve set up irrevocable insurance trusts, which are almost always grantor trusts, are considering whether to fund the premiums on the trusts’ policies, since gifts of cash to pay those premiums after the enactment date will at least in part be subject to estate tax.