Proposed Estate and Gift Tax Legislation--Review Your Planning Options

Recently, several senators have formally proposed legislation that, if adopted, would make significant changes to the current gift and estate tax system. It is likely that some of these changes will ultimately become law. However, if you act soon, there are ways to take advantage of the “old” law before any changes become effective.

The proposed legislation greatly increases the rates of gift and estate tax. Of more immediate concern is that effective January 1, 2022, the current $11.7 million exemption from estate tax will be reduced to $3.5 million per estate, and the existing $11.7 million lifetime gift exemption will be reduced to $1 million. Accordingly, there remains a window of opportunity to make significant transfers to your intended beneficiaries during the remainder of calendar year 2021. However, this window of opportunity may be reduced or eliminated as the proposed legislation nears adoption.

The current gift tax law allows an individual donor to give an unlimited amount of property away each year, provided that no more than $15,000 ($30,000 if married) is transferred to the same donee. The current proposed legislation would limit this amount of gifting to $10,000 per donee, and cap the total amount that can be transferred by a donor to $20,000 per year. This is a very significant change in the annual exclusion rules. If you have a large family or are otherwise taking significant advantage the annual gift tax exclusion, you should consider making your 2021 annual exclusion gifts earlier in the year.

The proposed legislation also takes aim at GRATs (Grantor Retained Annuity Trusts). GRATs created after the date of enactment would be required to have a 10-year minimum term, and more significantly, would be required to have a remainder value (a taxable gift value) equal to the greater of 25% of the value of the property contributed to the GRAT or $500,000. This change, coupled with the planned reduction in the gift tax exemption from $11.7 million to just $1 million, would effectively eliminate GRATs in almost all but unique sets of circumstances. Accordingly, if “rolling” two year GRATs with investment securities are part of your planning, you should consider creating such GRATs before the proposed law is enacted.

A favorite tool of estate planners has been to create family investment companies and then claim valuation discounts when minority interests in such entities are included in an estate or gifted to other family members. The current proposed legislation would eliminate valuation discounts for passive investment entities. If you are considering using a family limited liability company to hold investment assets and giving fractional interest in such entity to other family members, you should do so before any legislation is enacted. Even then, there is no assurance as to the effective date of the proposed changes to the valuation rules so the anticipated reductions in value might not materialize.

The proposed legislation would also limit the effectiveness of irrevocable gift trusts by preventing those trusts from being taxed as “grantor” trusts if the goal is to exclude the trust assets from the grantor’s estate for federal estate tax purposes. This would require the trust or the beneficiaries, rather than the grantor, to bear the economic burden of the income tax on the income earned by these trusts.

One tool utilizing grantor trusts involves a sale of assets to an Intentionally Defective Grantor Trust (“IDGT”). Under the proposed legislation, IDGTs are includable in the Grantor’s estate. Existing IDGTs are grandfathered in under this new rule, unless there are transactions between the Grantor and the IDGT after effective date of the new law. If you are planning on starting an IDGT or having a transaction with an existing IDGT, it is important to take action now before the new law is effective.

While the proposed legislation contains other modifications, a final major change limits the length of time that trusts can avoid transfer tax to 51 years. In other words, trusts that extend beyond 50 years would cease being exempt from the generation skipping transfer tax and, furthermore, all trusts existing on the date of enactment would become subject to generation skipping taxes 51 years later.

Some or all of these provisions may become law. It is clear that the momentum in Congress is to make significant changes to the taxation of wealthier citizens. Accordingly, prudence suggests that you review your estate situation, and if advisable, take advantage of the current law before the proposed legislation is enacted.

If you have any questions or would like to discuss any of the points made in this note, please feel free to contact anyone in the Katz Teller Estate Planning Group.

Bob Brant, rbrant@katzteller.com, (513) 977-3405

Bill Russo, wrusso@katzteller.com, (513) 977-3479

Jody Brant, jsbrant@katzteller.com, (513) 977-3473

Whitney Maxson, wmaxson@katzteller.com, (513) 977-3462

Maggie Gibson, mgibson@katzteller.com, (513) 977-3410

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