Proposed New Tax Legislation Would Dramatically Affect Estate Planning
Congress is considering certain tax law changes which may adversely impact your ability to pass assets to your family in a tax-efficient manner in the future. While in general the tax proposals are wide-ranging and cover many areas of taxation, a few proposals relate to the Federal estate and gift tax – and potentially prompt a meaningful reconsideration of tax minimization strategies. These proposals are:
- The decrease in the current $11,700,000 per person estate and gift tax exemption ($23,400,000 for a married couple), which was scheduled to occur on January 1, 2026, would be accelerated to January 1, 2022. The exemption would decrease to approximately $6,000,000 per person or $12,000,000 for a married couple. The tax rate for assets in excess of the exemption would remain at 40%.
- Gifting assets to grantor trusts during lifetime has historically been an effective way to reduce one’s estate tax obligation on death. Generally, a grantor trust is one in which a spouse is a beneficiary, trust income can be used to pay life insurance premiums, or the grantor has a power which makes the grantor responsible for paying the trust’s income taxes. As proposed, assets contributed to a grantor trust after the date of enactment of the new tax law, whether such trust is a new grantor trust or one that was created prior to enactment, will be includible in the grantor’s estate and subject to estate tax on death if the value of the estate exceeds the exemption.
- Valuation discounts would be disallowed for non-business assets both for gift tax purposes if such assets are gifted and for estate tax purposes if they are not gifted but are retained and included in the estate.
While it is uncertain whether any of these proposals will actually become law, if you wish to take advantage of the current $11,700,000 exemption by making large gifts, you should do so before the end of this year. Furthermore, since the proposed grantor trust changes would have an effective date as of the date of enactment and that date could potentially be before the end of the year, if you wish to make gifts to grantor trusts you should proceed immediately.