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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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