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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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Texas Mechanic’s & Materialman’s Liens: Understanding the Basics

I. Who is Entitled to Lien?

Under the Texas Property Code, the class of persons who fall under the definition of “Mechanics and Materialmen” is broader than the phrase may suggest.  Mechanics and materialmen include any person who has provided labor, services, or materials for the improvement of real property (e.g. general contractors, subcontractors, sub- subcontractors, and suppliers).

You are entitled to claim a mechanic’s and materialman’s lien if you:

    • provided labor or materials for construction, repair, landscaping, or demolition of a structure or real property pursuant to an agreement with the owner, the general contractor, or a subcontractor;
    • fabricated materials specially for incorporation or use in an improvement to real property pursuant to an agreement with the owner, the general contractor, or a subcontractor, even if the material is not delivered;
    • are an architect, engineer, or surveyor who prepared plans, reports, drawings, or specifications relating to any improvement to real property under a written contract with the owner, the general contractor, or a subcontractor;
    • provided labor, plant material, or other supplies for the installation of landscaping for a house, building, or improvement, including the construction of a retention pond, retaining wall, berm, irrigation system, fountain, or other similar installation, under a written contract with the owner, contractor, or subcontractor; or
    • performed labor as part of, or furnished labor or materials for, the demolition of a structure on real property under a written contract with the owner of the property, contractor, or subcontractor.

The persons entitled to a lien are wide-ranging. But it is important to note that for the last three categories a written contract is required.

II. Accrual of Indebtedness

General Contractor: Indebtedness accrues upon the occurrence of one of two scenarios:

    1. The general contractor or owner provides Notice of Termination of the general contract to the other party, in which case the owner’s indebtedness to the general contractor accrues on the last day of the month in which the Notice of Termination is received.
    2. Absent any Notice of Termination, the owner’s indebtedness to the general contractor accrues  on the last day of the month in which the general contract is completed, finally settled, or abandoned.

Subcontractor:  The  general  contractor’s  indebtedness  to  its  subcontractor  who  has furnished labor or material(s) to or for the general contractor accrues on the last day of the last month in which the subcontractor provided such services. The same rule applies to the accrual of indebtedness between a subcontractor and a sub-subcontractor, but a sub-subcontractor is subject to more stringent pre-lien notice requirements (as further discussed below).

Specifically fabricated materials: Indebtedness to a party who fabricated materials specifically for the project accrues on the last day of the:

    1. last month in which materials were delivered to the property;
    2. last month in which delivery of the last of the material to the property would have been required normally; or
    3. month of any material breach or termination of the general contract or of the subcontract agreement under which the specially fabricated material was furnished.

III. Deadlines for Notice and Recording

The Texas Property Code lays out specific mandatory deadlines for sending pre-lien notices of claims and filing the Affidavit Claiming Mechanic’s & Materialman’s Lien. For more information on these all-important deadlines see: M&M Lien Notice Time Table (more…)

Topic: Construction Law