Issue No. 3 | March 2021

By Cynthia L. Umphrey

We know that major Estate, Gift, and GST tax increases are due to automatically occur in 2026. We have also seen significant federal spending around the pandemic and a shift in party control in Washington so that changes are likely to come much sooner than 2026 and bring with them increases in income taxes as well. This combination likely means that you would like to start planning now to minimize the effects of possible changes to your family’s financial security. But how do you begin when we have some known factors but still so many unknown?  Here are just a few of the many considerations and options you might want to either start planning for or acting on right now in the Estate, Gift and GST Tax arena. 

Consider the effect on your family of a major reduction in Estate, Gift and GST Tax Free Amounts: What I call the Estate, Gift and GST Tax Free Amounts are basically the amounts you can transfer to anyone without incurring a gift, estate or generation-skipping transfer tax cost.  Collectively, I refer to these sometimes as Transfer Taxes below. The current Estate, Gift and GST Tax Free Amount is quite generous at $11.7 million.  It is due to automatically reduce to an indexed number that would be about $6 million on January 1, 2026.  However, changes may come sooner and may be much more severe. Various proposals would reduce the Estate and GST Tax Free Amount from $11.7 million to as little as $1 million (unlikely), $3.5-5 million (fairly likely) and would limit the Gift Tax Free Amount to as little as $1 million. Any one of these changes would obviously vastly expand the number of taxpayers who would have to pay the tax and severely limit planning options. There are also proposals that would negatively impact capital gains tax planning at death and that would limit the ability to use discounting in connection with Transfer Taxes.  Since the Transfer Tax rate is 40% and since this may also be increased to 45% or more, the resulting Transfer Taxes would be devastating to many families’ plans. Since there is some speculation that the changes could be made retroactively effective to as far back as January 1, 2021, waiting may not be your best option.

Consider the Special Needs of your Closely-Held BusinessesClosely-held businesses can be especially affected by Transfer Taxes because they are valuable but illiquid.  Luckily, there are many options available to assist the closely-held business owner to protect a business interest from Transfer Taxes.  If you own a closely-held business interest, I urge you to look at Transfer Tax planning now. 

Consider Intra-Family Loans: Interests rates are extremely low.  You might consider an arrangement under which you make a very low interest loan to your beneficiaries or a trust for them.  So long as the investments made with the loan proceeds outperform the very low interest rate, you have transferred assets outside of the Transfer Tax system.  Further, you can gift promissory note balances if this is desired in the future, and sometimes a lower discounted value may be placed on the gift of the promissory note.

Consider Multi Generational Transfer Tax PlanningHuge Transfer Tax savings can occur when you work with your parents on leaving assets to you in a Transfer Tax advantaged manner and if you do the same for your children and their issue.  Why allow assets to be taxed if it can be avoided?  Many trust arrangements provide excellent Transfer Tax planning, income tax planning, good creditor protection and still offer reasonable flexibility. 

Consider a Spousal Lifetime Access Trust (“SLAT”): If you are married, a SLAT can allow you to transfer assets out of your estate for Estate and GST Tax purposes while allowing your spouse continued access to the asset.  This can be an excellent way of hedging your bets when making large transfers. Read more about SLATs in a recent article by my colleague, Will Sanford.

The above are just a very few examples of some considerations to help protect you and your family from possible and pending tax law changes. It is very important that any solution is specifically tailored to your goals, your family, and your overall situation, and we are very happy to guide you through the process.

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