Gift and Estate Tax Planning Opportunities

On September 15, 2021, the House Ways and Means Committee proposed tax increases as part of the Build Back Better reconciliation bill. The estate and gift tax provisions included:

1. Subjecting grantor trusts to estate tax.
2. Treating sales by grantors to grantor trusts as sales between the owner and a third party, so that gain or loss would be realized on these transactions. Historically and under current law, sales between a grantor and a grantor trust are disregarded for income tax purposes, an important provision when contemplating income and estate tax planning.
3. Eliminating valuation discounts for non-business related assets.
4. Reducing the estate and gift tax exemption to approximately $6 million (from over $11 million under current law).

The proposed reduction in the exemption had an effective date of January 1, 2022; the other changes were proposed to take effect upon the date of enactment of the law change. These imminent changes caused many high net worth individuals to act quickly with respect to their estate plans.

On October 28, 2021, President Biden met with Democratic members of Congress and then addressed the nation to discuss an updated framework for the Build Back Better plan. That new framework included no changes to the estate and gift tax lifetime exemption or rules affecting grantor trusts and valuation discounts. In short, at the time of this writing, the updated framework does not include any of the provisions proposed by the House Ways and Means Committee, leaving the estate, gift, and generation-skipping transfer tax laws unaffected, for now.

SLATS

Married taxpayers may want to make lifetime gifts to use the balance of their exemptions but may be uncomfortable in not having access to the gifted funds. These taxpayers should consider making gifts to a spousal lifetime access trust (SLAT). The taxpayer who creates the trust will include his or her spouse as a beneficiary. By including the spouse as a beneficiary, the donor (grantor) grants the spouse direct access to the SLAT assets. While this is a completed gift for gift and estate tax purposes, a SLAT is generally taxed as a grantor trust for income tax purposes, allowing the trust assets to further grow tax-free for the spouse and any other beneficiaries. The payment of the income tax on a grantor trust does not constitute an additional gift, allowing the grantor to transfer additional wealth free of gift or estate tax.

Sell Assets to an Intentionally Defective Grantor Trust

• A taxpayer may sell assets to a grantor trust in exchange for a promissory note. (Real estate owners often are great candidates for this strategy.)
• By using a grantor trust, the sale of appreciated assets will not trigger income tax. In addition, the grantor will continue to pay income taxes on the trust income, thereby allowing the trust assets to grow tax-free. This strategy is ideal for assets with high potential for appreciation. Further, the payment of the income tax on a grantor trust does not constitute an additional gift.

Grantor Retained Annuity Trusts (GRATs)

• With market volatility and assets trading at depressed values, a Grantor Retained Annuity Trust (GRAT) enables a taxpayer to transfer assets to a grantor trust. The taxpayer retains an annuity interest for a term of years and leaves the remainder to their children.
• If the assets appreciate during the trust term, the appreciation passes to the children without using any of the taxpayer’s lifetime exemption amount.
• This type of trust can be structured as a zeroed-out GRAT; effectively, no lifetime gift or estate tax exemption would be used on the gift to the trust.

Refinancing Existing Promissory Notes

• Consider refinancing existing promissory notes, particularly intra- family loans. Interest rates are at historic lows, and this is a simple strategy that can preserve additional trust principal, thereby allowing more trust assets to grow for future generations.

Annual Exclusion Gifts

The 2021 annual gift exclusion is $15,000. This is the amount that can be gifted per person per year tax-free. In addition, married couples can elect to split gifts. Utilizing this strategy, married taxpayers can gift up to $30,000 to an individual in 2021 before a gift tax return is required.

Annual gifting is an excellent way to reduce the value of a taxpayer’s gross estate over time, thereby lowering the amount subject to estate tax. Keep in mind, if gifting to a trust an amount equal to the annual exclusion (or less), you should consult with your tax advisors about whether a gift tax return should be filed, despite the gift amount falling within the annual exclusion limits. The rules on gifts to trusts are rather complex, and generation-skipping transfer tax laws must be considered on all gifts to trusts (as well as gifts outright to individuals that skip generations).

Other strategies not covered in this article may also be employed, such as funding charitable remainder trusts and funding 529 plans (education planning) for children and grandchildren, among other planning options. Taxpayers should also consider state and local tax laws, and how they may differ from federal tax law with respect to estate planning.

Consult your Marcum tax professional to discuss gift and estate tax planning strategies that may be appropriate for your unique facts and circumstances.