LGT's Profit Sense

The Biden Administration has many popular estate planning techniques on the chopping block. The below article hopes to highlight the most significant proposed changes and potential planning techniques to consider before the end of 2021.

In September, the Ways and Means Committee issued the following proposals:

1. Imposing a 3% tax on trusts and estates with adjusted gross income over $100,000 (effective for future tax years)
2. Reducing the estate tax exemption from $11.7 million to 2010 levels indexed for inflation (approximately $6 million) (effective for future tax years)
3. Treating grantor trusts as part of the decedent’s estate and treating distributions from grantor trusts (other than to the grantor or grantor’s spouse) as taxable gifts made by the grantor (effective upon enactment for new trusts and contributions to pre-existing trusts)
4. Taxing sales between grantor trusts and their owners (effective upon enactment)
5. Eliminating valuation discounts for nonbusiness assets (effective upon enactment)

While plenty of uncertainty remains, it is clear that taxpayers should consider taking steps as soon as possible to minimize the impact of these changes.

Specifically:

• Form SLATs and GRATs before enactment: Spousal lifetime access trusts (SLATs) allow a spouse to create a trust for the benefit of the other spouse using the donor spouse’s gift tax exemption. SLATs are typically grantor trusts, allowing the assets to grow without paying income tax (since the donor is responsible for the taxes) and the assets are outside the donor’s taxable estate. Grantor retained annuity trusts (GRATs) allow a spouse to contribute assets to an irrevocable trust for a fixed duration that generate an annuity for the donor during the life of the trust and then the assets pass on to the beneficiaries. GRATs help prevent estate tax on the appreciated value of the contributed assets. These planning techniques will lose their value if the proposal passes to include all assets of a grantor trust in the grantor's estate for estate tax purposes.
• Make any sales to grantor trusts before enactment.
• Make gifts of certain nonbusiness assets. Valuation discounts (such as for lack of control and lack of marketability) are presently allowed for certain nonbusiness assets and these discounts can be significant. These discounts may essentially be eliminated as of the date of enactment so quick action may be required.
• Forgive installment notes and make gifts to trusts. You may wish to consider forgiving outstanding notes from earlier sales or creating a trust to gift certain assets to use against your gift exemption during 2021 while it is $11.7 million.
• Pre-fund irrevocable life insurance trust (ILIT) premiums: In addition to the above proposals, another proposal that is being given serious thought is a limit of $30,000 to annual gifts to trusts. Therefore, if you have an existing ILIT with high policy premiums, you may consider pre-funding several years of those premiums this year to use against your gift exemption (and minimize the other potential negative consequences of transfers to a grantor trust).

Please contact us to discuss how these proposals
may impact you.