It’s no secret that President Joe Biden’s Build Back Better Act is likely to cause some headaches for individuals and businesses. But what about estates and trusts? The consensus among experts contacted by NJBIZ: don’t take anything for granted, and keep in touch with your tax advisers.
The good news about estate tax planning for 2021 is that not much appears to be changed, at least in the present iteration of the act, according to Robert Tobey, a Tax Services partner at Grassi. “So a normal grantor trust appears to still be valid,” he noted, referring to an estate planning tool in which the grantor, or creator of the trust, retains certain power over the trust and, consequently, the trust’s income is taxable to the grantor. A grantor trust may be used by business owners to transfer ownership to younger generations and protect certain types of interests from potential creditors or claimants.
But he’s not so sure about another issue: the ability to discount a gift of a fractional share of a closely held business interest or certain other assets. “Currently, the value of such a gift may be reduced from its proportional value — one-tenth of a business interest, for example — because of a lack of control,” Tobey explained. “That could change in the near future, however, so it may be worth it to take action now, before year end. Every individual should consult with their advisers, though, since each situation may be different.”
The uncertainty surrounding the Build Back Better Act should help to incentivize fence-sitters to speak with their advisers about estate tax planning, said Richard Bloom, a partner with Mazars USA who focuses on trusts and estates. “Although there are no specific proposals in it regarding estate taxes, at least as of the last week of November, we’re recommending flexibility — if you’re planning to make gifts, you may wish to do so now, while the exemption is still high.”
So far, at least, the popular SLAT — spousal lifetime access trust — appears to be safe, he noted. “In a SLAT, a donor spouse funds the irrevocable trust, which is typically on behalf of his or her non-donor spouse and other family members, like children and grandchildren.”
The donor spouse is not a beneficiary, he added, but the trustee could make distributions to the non-donor spouse during the non-donor’s spouse’s lifetime. That can indirectly benefit the donor spouse, perhaps by helping him or her to maintain their standard of living.
“We know that these exemptions are good now,” Bloom said. “But what if that changes in 2022? That’s why individuals should continue with their estate planning. It’s not a one-time event.”
GOOD NEWS, BAD NEWS
The streamlined version of the Build Back Better Act released by the Biden Administration on Oct. 28 and passed by the House of Representatives on Nov. 19, “was a welcome relief for estate planners as all of the estate and gift tax provisions were left on the cutting room floor,” said Eisner Advisory Group LLC Trusts and Estates Partner Scott Testa. “But although changes to estate tax are not in the current bill, this is an indication of what may be on the legislators’ agendas.”
First, he noted, barring any legislative changes, the current lifetime estate and gift tax exemption of $11.7 million per person is scheduled to sunset after 2025 anyway, and will revert to $5 million indexed for inflation — or about $6 million — in 2026. “Second, it appears that grantor trusts and sales to grantor trusts, popular estate planning moves, are on the IRS’ radar,” he said. “So, for a closely held business owner expecting exponential growth in their business or looking for a potential exit strategy, now would be the perfect time to make a gift. Furthermore, using a grantor trust as the recipient of such a transfer is an effective estate planning move.”
That’s not all. ”There is an income tax surcharge on high-income trusts and estates,” he explained. “For married individuals filing jointly, the surtax is an additional 5% on gross income over $5 million plus an additional 3% on income over $25 million. The 5% and 3% surtax apply, however, to non-grantor trusts and estates at a much lower income threshold: $200,000 and $500,000.”
One way around this surtax would be for the fiduciary “to distribute the income to a beneficiary or beneficiaries in a lower tax bracket,” he said. “If capital gains are the source of this income — for example from the sale of a business — the trust document needs to be reviewed and possibly revised since capital gains are typically taxed to the trust. Another move could be to convert a non-grantor trust to a grantor trust thus taxing the income to the grantor. In either case, proper planning and documentation are required and, as always, consult a tax professional.”
Even if there aren’t many surprises in store for trusts and estates this year, individuals shouldn’t be complacent about their tax planning, advises Phillip Goldstein, CEO of Goldstein Lieberman & Company CPAS LLC. “Don’t overlook the ability to gift up to $15,000 to any individual — regardless of whether they’re related to you — without triggering the donor gift tax,” he said. “And that amount is doubled if you’ve got a spouse. So a husband and wife with four kids and four grandchildren, for example, could gift a total of $240,000 [$15,000 per parent equals $30,000, multiplied by eight recipients] without incurring any penalty or being required to chip away at their lifetime exclusion of $11.7 million apiece, or $23.4 million per couple.”
And so far, at least, the tax code’s “step-up in basis provision” continues to adjust the value, or cost basis of an inherited asset to current market value when it is passed on after death, Goldstein added. “This may reduce the tax that a recipient may be subject to when he or she sells the inherited asset,” he said. “There’s been talk about limiting or eliminating the step-up rules but for 2021, at least, they’re still in effect. The ballooning federal deficit, however, may drive tax law changes in the future that could curtail these and other strategies. So it may be worth considering utilizing them now, while they’re still available.”[/vc_column_text][/vc_column][/vc_row]
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