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Change is Coming, Start Your Planning Today!

At the end of May, the Biden Administration released the government’s budget, along with the Treasury’s Green Book, which is the Administration’s proposed tax strategy to fund the budget. 

The Green Book is not proposed legislation, so the legislation will still have to be drafted and presented to Congress to come into effect. 

Although not all proposals are expected to go through, considering that the Democratic party controls both the House and Senate, it can be anticipated some changes will come. 

So, what are the proposed changes in the Green Book? Well, there were some positive things and negative things found in the proposals.

Let me start with the positive: 

The gift, estate, and GST exemptions remain the same. There is no alteration to the current limits, which means that there is not a rush to leverage these exemption levels today out of fear that the exemption will go down.

There is no increase to the Federal estate, gift, or GST tax rates. This means from an estate tax perspective, we can continue operating in much of the same fashion as we do today.  

It was anticipated that GRATs, one of the most effective estate planning tools, were going to be changed to limit their effectiveness. Fortunately, the Green Book was silent on this issue.

Now let’s talk about the negative:

Most of what the Biden Administration picked on was income tax and more specifically the capital gains tax.  If current proposals are implemented, the focus of planning will shift from estate planning to income tax planning. Some of these changes include:

The top income tax bracket will increase to 39.6%.

When a taxpayer has earned more than $1 million in income in a tax year, the long-term capital gains rate and qualified dividends rate for those earnings above $1 million will also be taxed at the top income tax bracket of 39.6%. In addition, the taxpayer will still have to pay the net investment income tax of 3.8%, making an effective capital gains tax on these assets of 43.4%.

When wealth transfers between two individuals (in life or at death), the IRS will view this as a capital gain realization event, assuming the property transferred is appreciated property. This proposal eliminates the beloved free step-up in cost basis at death that many planners have leveraged for years. 

Dynasty trusts will be forced to realize capital gains every 90 years on assets that have not had a realization event.

Valuation discounts that are used when transferring minority interest in a business, LLC, or other entity will be eliminated. 

So, with some of these radical changes, what can you do? 

First, meet with a qualified estate planning attorney to come up with a customized plan for your situation. 

You should consider maximizing your available exemptions now, even though the rates are not scheduled to decrease.  Create an irrevocable trust in 2021 before any new legislation passes. This will enable you to pass assets into a trust without having to worry about a capital gains tax being realized. 

If you have a business, real estate, or another asset that can benefit from leveraging a minority discount, you should consider transferring a partial interest in these assets now before you can no longer take advantage of minority discounts. 

I would recommend drafting a plan that has a lot of flexibility built into it. This can allow you to defer the decision-making for the estate plan until next year when you are no longer working under guesses of what legislation will get presented and passed. There are a few ways to do this, but two solutions that achieve this goal are to fund a marital trust (such as a SLAT) or leverage a qualified disclaimer. 

A SLAT (A Spousal Limited Access Trust) is an irrevocable trust that lets you leverage your lifetime exemption now by funding a trust established for your spouse (and potentially others). If you remain married to your spouse, and your spouse lives a long life, you will still be able to benefit from the assets placed in trust. At the same time, you can transfer the assets out of your estate and avoid having to worry about any estate planning changes that may come down the road. 

You can also leverage a qualified disclaimer to defer the decision-making until next year. The structure is quite simple: you establish a trust however you would like, but you add a provision in the instrument that sends all the assets back to you, as the grantor, if a disclaimer occurs. The beneficiary has nine months to complete a valid disclaimer if they have not taken any assets out of the trust. If the legislation comes out in such a way that you have buyer’s remorse, then you ask the beneficiary to disclaim his interest.  At that time, the trust will terminate, and the assets revert to you. If this trust is created at year-end, you will have until September 2022 to determine if you want to keep the trust. 

Even if none of the Green Book’s proposals get passed, Trump’s 2017 Tax Act is scheduled to sunset in 2027, which is just about five years away. At this time, the estate tax exemption will revert to $5 million per person, which is less than half of the current exemption available today. 

With this in mind, it may be a good idea for you to review your estate plan with a qualified estate planner to come up with a personalized plan in light of the pending changes.  

If you have any questions, feel free to reach out to me.

Thank you,

Jordan Wolff
Director of Personal Trust Administration 

Note: This post is not intended to contain any tax or legal advice and should not be relied on for tax or legal advice. You should consult your own tax or legal advisors to address any questions that you may have. 

Jordan Wolff
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