2021 - Stibbs & Co., P.C.

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All the New Estate Planning Changes – It’s Time to Act

Last Week, the House Ways and Means Committee proposed a draft bill which included major changes to our estate tax limits and our existing estate planning strategies. Below is a breakdown of all major changes. Keep in mind all proposed changes are subject to change, as this bill has only just been proposed by the House and has not gone through any Senate review.

1. Reducing the estate and gift tax exemption from $11,700,000 to $6,020,000 per person, effective January 1, 2022.
2. Eliminating valuation discounts in gifting passive, non-business-related assets (family limited partnerships, etc.), effective once the bill is enacted.
3. Subjecting grantor trusts to estate tax – thus, limiting the effectiveness of GRATs, QPRTs, SLATs and insurance trusts, effective once the bill is enacted.

Estate and Gift Tax Exemption Changes

Currently, each individual can transfer up to $11,700,000 without incurring a federal gift, estate or generation-skipping transfer (“GST”) tax. The draft bill would reduce each exemption amount to $6,020,000 at the beginning of next year. This reduction is important for any client considering using up their exemption this year. Before December 31, 2021, a client can transfer $11,700,000 without incurring a federal transfer tax (and a married couple that agrees to “split” the gift can transfer up to $23,400,000).

Valuation Discount Changes

Clients who own interests in hedge funds, private equity funds, family partnerships or LLCs often wish to gift a portion of their interests to a trust for their descendants. These gifts have typically been able to benefit from significant discounts for lack of control and lack of marketability. These discounts arise because a third-party willing buyer would pay less for a minority interest in an entity where the buyer lacks control and holds only a minority position. The draft bill removes any valuation discount for entities that hold passive assets.

Grantor Trust Taxation

A “grantor trust” is a trust that is disregarded for federal (and sometimes state) income tax purposes, meaning that the “grantor” (or creator) of the trust pays all income tax on behalf of the trust. Yet, trust assets are not “included” in the grantor’s estate for federal estate tax purposes, meaning that the trust is not subject to federal estate tax on the grantor’s death. This type of trust allows assets to appreciate income tax free for the beneficiaries.

The draft bill adds new sections to the Internal Revenue Code that would change the use of grantor trusts in three important ways:

- A grantor trust would be included in the “deemed owner’s” taxable estate, the appreciation on the gift to the grantor trust is included in the grantor’s estate.
- Any distribution from a grantor trust to a trust beneficiary will trigger gift tax, unless the beneficiary is the grantor’s spouse or a minor child of the grantor.
- Asset sales to the grantor trust by the deemed owner would incur federal income tax in the same manner as if the deemed owner sold assets to a third party.

After enactment, the following estate planning opportunities become either less desirable or even unavailable: (a) funding grantor retained annuity trusts (“GRATs”) or qualified personal residence trusts (“QPRTs”), (b) funding spousal lifetime access trusts (“SLATs”) and (c) funding irrevocable life insurance trusts (“ILITs”).

It’s time to act on your Estate Planning.

Prior to the enactment date of the draft bill, SLATs, GRATs, QPRTs and other grantor trusts are still available options for estate planning with all of the benefits as we have known them. In addition, if you have existing trusts and are considering making changes to their terms through decanting, now is the time to do it. If you were considering making any significant gifts, you have until the end of the year to make those decisions.

These materials are made available by Stibbs & Co., P.C. for informational purposes only, do not constitute legal or tax advice, and are not a substitute for legal advice from qualified counsel. The laws of other states and nations may be entirely different from what is described. Your use of these materials does not create an attorney-client relationship between you and Stibbs & Co., P.C. The facts and results of each case will vary, and no particular result can be guaranteed. The facts and results of each case will vary, and no particular result can be guaranteed.

Topic: Probate and Estate Planning

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Service in Texas: New Rules Permit Service Via Social Media and Email

Written by Adam R. Fracht

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Everyone recognizes the infamous “you’ve been served” phrase from the movies, where a random individual hands a person—the defendant—a sealed envelope and proceeds to run away before the defendant gets angry. But what many people do not realize is that, in today’s age, service may take on many new forms. In fact, you may want to check your email inbox, Facebook wall and Instagram DMs (direct messages) for one of those classic “you’ve been served” messages. Welcome to lawsuits in the 21^st century.

Traditionally, service of a lawsuit requires a constable, sheriff, or private process server to personally deliver the lawsuit to the defendant. But sometimes physically finding the defendant is easier said than done. While service via mail or even publication in the newspaper is sometimes considered, such options have their own problems.

When a defendant is really hard to find, courts frequently grant the plaintiff permission to serve the defendant in other reasonably effective ways, such as posting the lawsuit to the front door of the defendant’s house. Such service is called “substitute service.” Substitute service works great on occasion, but what if the person’s front door is behind a six-foot fence, or in a gated community? Not so easy.

Meanwhile, tucked behind that six-foot fence or nestled within that gated community, the defendant frequently remains active and easy to contact on social media sites like Facebook and Instagram, and via their email address.

In apparent recognition of this dilemma and our modern-day digital presence, the Texas Supreme Court recently sought to “digitalize” the law on serving lawsuits. Effective January 1, 2021, the Texas Supreme Court now permits lower courts to substitute serve defendants by social media, email, or other technology. That means plaintiffs will have much greater means for serving defendants who remain physically elusive but digitally accessible.

Some care must be taken in this new approach. The Texas Supreme Court orders that a lower court—in determining whether to permit such electronic service of a lawsuit—should consider whether the “technology” (likely meaning the electronic account or email address at issue) actually belongs to the defendant and whether the defendant regularly uses or recently used the “technology.”

So be sure to keep up to date with your Facebook wall and to check your Twitter DMs; there may just be a lawsuit waiting for you in there!

If you have questions regarding the above, or think someone may have attempted to serve you through social media or email, please contact Stibbs & Co.

Topic: Commercial Litigation