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Proposed Tax Changes May Require Immediate Action

As you may be aware, proposed changes to the federal estate, gift and income tax laws are currently sweeping through Congress. If these changes are approved, they may have a significant impact on the estate planning decisions of affluent families. As of the date of this article, no legislation has been passed, but a couple of the potential key changes to the gift and estate tax are highlighted below:

  • Reduction of the federal estate and gift tax exemption. The current total exemption for both federal estate and gift tax is $11.7 million per person for the year 2021. Thus, married couples have a combined $23.4 million exemption from federal estate and gift tax this year. The proposed legislation would potentially cut the exemption amount roughly in half, however, to approximately $6 million per person.
  • What this means: For individuals whose assets exceed $6 million, or couples with assets exceeding $12 million, decisions will need to be made, and made soon, in order to take advantage of the current exemption before it is reduced. Fortunately, in anticipation of the eventual reduction, the IRS issued regulations in 2019, which prevent the claw-back of gifts made during the current period of increased exemption. However, it is a “use it or lose it” system.  In other words, if an unmarried individual makes a gift of $11.7 million before January 1, 2022, the effective date of the proposed legislation, but passes away after the tax exemption is reduced to approximately $6 million, the $11.7 million gift will be preserved as the exempted amount instead of $6 million. If, however, the same unmarried individual gifts $9 million in 2021 and dies in 2022, he or she will have exempted $9 million from federal estate and gift tax, but the unused $2.7 million exemption amount would be lost. While the federal estate tax rate of 40% is not projected to change, anyone impacted by the reduction in exemption amount is well advised to meet with his or her estate planning attorney now to consider the options and strategies available to avoid adverse tax impacts.
  • Grantor Trusts. Grantor trusts are vehicles often used as a strategy to avoid the hefty federal estate tax mentioned above. Historically, a grantor trust has been used to keep assets separate from the individual funding the trust (i.e. the grantor) and excluded from his or her gross taxable estate, while still treating the grantor as the owner for income tax purposes. The proposed changes could eliminate the efficacy of such trusts as an estate planning tool. Grantor trusts established and funded prior to any new legislation would be “grandfathered” and continue to enjoy beneficial treatment. The proposed legislation concerning grantor trusts is set to become effective on the date of enactment, which could be sooner than January 1, 2022. Therefore, anyone wishing to utilize a grantor trust strategy needs to act swiftly to both create and fund such a trust.
  • What this means: This proposed change could essentially eliminate the benefits associated with tools such as Spousal Lifetime Access Trusts (SLATs), Intentionally Defective Grantor Trusts (IDGTs) and Qualified Personal Residence Trusts (QPRTs) as estate planning strategies for clients wishing to exclude assets from their taxable estate.


Other noteworthy changes to the income tax laws could include:

  • Surcharge on High Income Trusts and Estates. Beginning January 1, 2022, a 3% tax may apply to trusts and estates with adjusted gross income in excess of $100,000. This additional tax would only apply if income exceeding $100,000 remains in the trust or estate after distributions to the beneficiaries.
  • Capital Gains Tax Rate.   The maximum capital gains tax rate may retroactively increase from 20% to 25% beginning September 13, 2021. Notably, however, the 20% rate would still apply to gains and losses incurred prior to September 13th, as well as gains incurred from transactions entered into under the terms and conditions of written contracts established prior to the potential September 13th effective date.

The Estate Practice Group at Stock and Leader is here to assist you in achieving your estate planning goals. If you wish to take advantage of the increased exemptions while you still can, please call Stock and Leader today before these potentially tax adverse changes take effect.

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