By Brian R. Jenney

Potential significant changes to tax laws require advisors and clients to act now. The House, Senate and the Presidency are held by Democrats, giving President Biden the potential opportunity to implement some significant proposed tax changes.

President Biden has proposed eliminating the stepped-up basis rule. The stepped-up basis rule is an adjustment to the cost basis of an appreciated asset to its fair market value at the time of the owner’s death which allows a deceased individual to pass an asset onto his or her children at the date of death FMV. The current 2021 estate and gift tax exclusion amount is $11.7 million. President Biden’s proposal is to lower the exclusion amount to $3.5 million. The current top federal tax rate for the estate and gift tax is 40%. President Biden would like to increase the top federal estate tax rate to 45%.

Depreciated asset values caused by the COVID-19 pandemic’s effect on the economy, low interest rates and the high estate and gift exemption amount have created a significant opportunity to implement gifting strategies to reduce the tax exposure on your estate.

Furthermore, taxes may need to be increased to raise revenue for the massive federal stimulus spending enacted in response to the COVID-19 crisis.

Joe Biden and congress could pass tax reform legislation in 2021 and it is possible the changes will be retroactive to January 1, 2021.

Clients should consider the following tax strategies:

1. Roth IRA Conversion
Taxpayers should consider converting a traditional IRA into a Roth IRA.

Roth IRAs are funded with after-tax money and the assets grow tax free and generally are not taxed when distributed, potentially resulting in lower taxes paid.

Roth IRAs allow the taxpayer to contribute to the Roth IRA for the rest of his or her life. RMDs are not required during the lifetime of the original owner of a Roth IRA.

Individuals contributing to Roth IRAs can choose to not receive distributions as long as he or she is alive.

A qualified distribution from a designated Roth Account is excludable from gross income. A qualified distribution is one that occurs at least five years after the conversion and is made:

On or after attainment of age 59½,

On account of the individual’s disability, or

On or after the individual’s death.

2. Family Limited Partnerships or Family Limited Liability Corporation
Clients should consider creating a FLP of FLLC and making significant gifts of partnership interests or membership interests to their children or grandchildren. The value of the interest transferred qualifies for reduced valuation, plus it allows for a gradual transfer of assets to the next generation.

3. Spousal Lifetime Access Trust (SLAT)
A SLAT is a gift from one spouse (the donor spouse) to an irrevocable trust for the benefit of the other spouse (the beneficiary spouse). A SLAT allows the donor spouse to transfer and use the donor spouse’s available estate and gift tax exclusion amount. When the donor spouse dies, the value of the assets in the SLAT is excluded from the donor spouse’s gross estate and are not subjected to the federal estate tax. See article on page three for more on SLATs.

4. Grantor Retained Annuity Trust (GRAT)
A GRAT is an irrevocable trust used to make future gifts of appreciating property to children and grandchildren at minimal or no gift tax cost. A GRAT makes sense only if the property appreciates at a rate faster than the Applicable Federal Rate (AFR). The grantor transfers assets into a trust for a term of years and during the term of the trust, the grantor receives an annuity payment, at least annually, of either a fixed dollar amount or a fixed percentage of the fair market value of the property placed into the trust. At the end of the trust term, any remaining principal will be distributed to the trust beneficiaries.

5. Charitable Lead Trusts (CLT)
A CLT pays an annuity to charities that you choose and then, after a period of years, the principal is paid out to your children or grandchildren. The trust may be established for a term of up to 20 years or can be based on the life or lives of individuals living at the time of the creation of the trust. The amount of the charitable contribution deduction at the creation of the CLT will be the present value of the annuity using the Section 7520 Rate. A CLT will result in a taxable gift upon creation equal to the fair market value of the assets gifted to the trust reduced by the present value of the annuity.

6. Family Loans
Family loans are very simple and provide a significant opportunity for clients. The transferor loans (parent) funds to the transferee (children) and is documented by a formal promissory note. As long as the loan bears interest no lower than the AFR, the transaction will not be considered a gift. These intra-family loans work best in low-interest-rate environments which we have now because the wealthier senior generation of a family can loan cash to the younger generation at attractive interest rates.

7. Qualified Personal Residence Trust (QPRT)
A QPRT is an irrevocable trust to where the client transfers his or her primary residence or vacation home for a set term that is less than his or her life expectancy. During the term of the trust, he or she continues to live in the residence. When the specific term of years ends, the trust continues for the benefit of the client’s children and the client must pay rent to the trust. The tax advantage of a QPRT is that there is a gift of only a fraction of the value of the primary residence or vacation home when the client establishes the trust.

We realize that many of our clients are reluctant to incur the expenses of advanced estate planning during these uncertain times. However, the current tax laws, circumstances and facts contain substantial opportunities for estate and gift tax planning and we welcome the occasion to discuss how you can take advantage of them. Please contact Brian R. Jenney, Cynthia L. Umphrey or Kate L. Ringler.


For further information regarding these matters, please contact Mr. Jenney at 248.740.5688 or via email.