October is around the corner, which means it’s time for the September review of elder law news and developments. Of utmost concern: Potential changes to the estate tax. We’ll devote most of our review to the current proposal, even though it’s very far from a done deal. Those who might be affected should think about preparing for “what ifs.”
Taxing Landscape
Democrats have been talking about taxing the rich for a while. This month, the plan really got going. The House is fast-tracking a proposal from House Ways and Means Committee to pay for President Biden’s $3.5 trillion reconciliation bill. Which changes will survive is uncertain; lawmakers refer to it as “a menu of options.” Some tax adjustments likely will take effect in 2022 (or even before), but no one really knows what they’ll look like. Still, the proposed changes are alarming enough to put estate planners everywhere on edge. The highlights of only the major changes that could affect your estate planning:
The Exemptions
Now: People give away $11.7 million (or $23.4 million per married couple) during their lifetimes or at death without paying any estate or gift tax.
Proposed: The basic exclusion amount reverts to a $5 million base, adjusted for inflation starting with 2010. This change was already planned for January 1, 2026. The proposal moves that up to next year. Sources say the basic exclusion amount would be about $6 million per person, or $12 million per married couple. The same change would apply to the generation-skipping transfer exemption. If this change does not go through, it is estimated that the exemption will exceed $12 million beginning in 2022.
Grantor Trusts
Now: One estate planning technique is a sale to a grantor trust in which the grantor is also the owner of the trust assets. No gain is recognized, avoiding income tax. And the asset appreciates outside the grantor’s estate, avoiding estate tax.
Proposed. The technique is pretty much eliminated. Assets transferred to such a trust will be included in the grantor’s estate if he or she is deemed the owner. And distributions and terminations, for the most part, will be treated as gifts for gift tax purposes. Sales or exchanges between a grantor trust and the deemed owner would trigger gain, and losses would be disallowed.
Valuation Rules
Now: Planners often use discounts to reduce the value of an asset by gifting minority interests – worth less due to the lack of control.
Proposed: Discounts are limited, particularly for nonbusiness or “passive” assets, or those not used to actively conduct a trade or business.
What Did Not Change (So Far)
Portability, which allows surviving spouses to take advantage of their deceased spouse’s exemption, remains an option.
Step up in basis, which re-sets an assets’ tax basis at death. President Biden had proposed eliminating this perk for assets over $1 million.
No wealth tax, but Sen. Elizabeth Warren is still pushing.
Given the maybe-maybe not uncertainty, here’s:
- Some suggestions for what clients should consider doing now.
- More detail and a call to action.
- Some context and commentary.
- More recommendations.
- More detail on grantor trusts.
- And an interesting perspective: the Christian case for Biden’s tax plan
September Review: Estate Planning
Don’t forget: there are other techniques that will still work if you want to avoid estate tax. Some of them are included here.
And there are planning challenges that will be here regardless of what happens with tax proposals, including how to avoid probate, and how to plan for singles, cohabitating couples, and business owners.
Speaking of business owners, this article says the fight over Bob Ross’s estate has lessons every business owner can learn. Here’s a big one: carefully consider how ownership changes at your death. Make sure it matches both your wishes and the rest of your estate plan.
Estate Sale of the Month
Last but not least for the September review, if you were a fan of late singer B.J. Thomas, rockology.com is having an estate sale. You can pick up a Raindrops Keep Fallin’ on My Head umbrella for just $125.
