Timely Estate Planning Strategies: Part One
Oct 11, 2021
Current Ideal Estate & Gift Planning Environment On Its Way Out
For the past few years, we have experienced a near-perfect environment for estate and gift planning purposes given the vastly expanded exemption amounts, low-interest rates, and retention of step-up in basis at death.
The Perfect Storm
How did we get here you ask? When Congress passed the 2017 Tax Cuts and Jobs Act (TCJA), substantial changes were made to the estate, generation-skipping transfer, and gift tax laws. Most notably, the TCJA included:
- A doubling of the basic exclusion amount from $5 million to $10 million, indexed for inflation, and an exclusion amount of $11.7 million for 2021. Coupled with proper planning around the concept of portability of a spouse’s amount, this could allow a married couple up to $23.4 million of assets to be exempt from the estate tax.
- The retention of the concept of “step-up” in basis at death. With the increased estate exclusion amount, income tax savings from the basis step-up at death sometimes became more important than trying to avoid estate tax via gifting or other transfer techniques.
These provisions were to be effective from 2018 through the end of 2025. Furthermore, regulations subsequently issued by the IRS stated there would be no clawback or adjustment of increased amounts taken by taxpayers during this period when the amounts reverted back to the old amounts on January 1, 2026.
This coupled with recent ultra-low interest rates left taxpayers and their planners taking a renewed interest in reviewing family gift and estate plans to take advantage of the perfect storm.
While these conditions were expected to remain until 2026, the political winds have changed and with that is incredible uncertainty regarding what changes might be coming and when.
A number of proposals have been outlined which would greatly impact gift and estate plans—both existing and those contemplated. Among the proposed changes:
- drastic reduction in the basic estate exclusion amount
- possible increase in estate tax rates
- restrictions on certain transfers in trust
- restrictions on discounts when valuing property
More critical are the various effective dates proposed which may be retroactive to earlier this year.
While no one can predict the future, these potential changes make for increased risks and uncertainty in planning in the current environment. What is clear, however, is that regardless of what changes are ultimately made and when their effective date might be, the estate and gift tax rules will be far less liberal or beneficial than they are right now.
What Should I Do Now?
We believe significant planning opportunities exist under the current law and urge you to review your personal plans now. If new trusts or other asset transfer plans are contemplated, you will need to act immediately.
Here are some basic recommendations. Stay tuned to our series as we will delve into two other opportunities you should be considering before year-end:
- Make Gifting A Priority – Your timeframe to complete gifts may be much shorter if your plan involves an irrevocable grantor trust or gifts of interests in nonbusiness assets held in a limited liability company (LLC), partnership, or other private entity.
- Fund Grantor Trusts – Irrevocable grantor trusts allow you to gift assets and continue to be the owner of those assets for income tax purposes. Under the new proposals, these tax benefits would no longer be possible as soon as the new law is enacted.
- Complete Gifts of Nonbusiness Assets in LLCs or LPs – Currently, if you gift a minority or non-controlling interest in a private entity, the interest is valued at a lower price to account for the lack of control and marketability. Under the new proposals, these discounts would go away if the LLC’s assets include publicly traded securities, non-operating cash, or other passive, non-business assets.
We highly encourage you to not only contact your William Vaughan Company practitioner but also your financial advisors so your personal situation can be reviewed and updated before your potential risk may increase.
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