Estate and Gift Planning in the Face of Uncertainty

By Christopher D. Wright  |  August 30, 2021

Estate and Gift Planning in the Face of Uncertainty

At the end of last year, there was great speculation about large-scale changes in estate and gift taxation. Certain pundits were predicting that after President Joe Biden took office, the estate tax exemption would be decreased to $3.5 million per taxpayer, capital gains rates would be eliminated, the top estate tax rate would increase to 45%, step up in basis would cease to exist and grantor trusts would go the way of the dinosaurs.

As we approach the fall of 2021, what has changed? Nothing. With the exception of the “For the 99.5 Percent Act” (S. 994) introduced by Sen. Bernie Sanders (I-VT) and the corresponding H.R. 2576 in the House, there has been no significant estate tax legislation proposed, capital gains rates have not changed and the lifetime exemption has not gone down.

Does this mean that all the planning done at the end of 2020 and continuing throughout 2021 was a waste of time? Absolutely not. Even if Congress does nothing to the current estate tax system, it will change in 2026 as the provisions enacted in the Tax Cuts and Jobs Act (“TCJA) of 2017 will sunset. The current $11.7 million lifetime exemption will go back down to $5 million, indexed for inflation. That means it is prudent to use the higher exemption now while you still have it.

Change is inevitable, and at some point, Congress will enact estate tax legislation, but in the absence of a working crystal ball we don’t know when that will happen. While we currently do not know how the law might change, there are several proposals being floated, most notably in the form of provisions in President Biden’s American Families Plan.

This is the first in a series of articles that will look at some of these proposed changes and the impacts to planning if they do in fact become law. The series will be broken down in to three segments:

  • This article will take a look at President Biden’s “American Families Plan”

  • Article 2 will focus on the “For the 99.5 Percent Act”

  • Article 3 will discuss planning techniques to consider if no legislation is enacted before 2026

American Families Plan

The good news is that as set forth in the U.S. Treasury Department’s “Green Book” – a detailed report on the provisions of the American Families Plan – there is no mention of either decreasing the lifetime exemption or increasing the estate tax rate. That is where the good news ends. While there are no direct provisions relating to gift and estate taxation, there are several provisions that will impact how we plan in the future. Let’s look at two of the major provisions.

Changes to Capital Gains

The proposed act eliminates the capital gains rate on long-term capital gains and qualified dividends for those taxpayers with income in excess of $1 million ($500,000 if married filing separately). The kicker is, if enacted, the higher rate will apply from the announcement date of the act, which is generally considered to be April 28, 2021. This leaves little room to avoid the higher tax if the transactions have already occurred unless the taxpayer has unrealized losses that could be recognized to lower the capital gains.

Deemed Sales Events

This is the most significant part of the act and will dramatically change estate and gift planning going forward. There are four major components to these proposed changes.

  • Transfer at death or by gift
    Under current law transfers at death or by gift are only subject to estate or gift tax. Under the proposed plan they would also be subject to income tax. The transfer of appreciated property at death or by gift would be considered a deemed sale and subject to income tax (there is a $1 million exclusion per donor or decedent.) The tax paid on transfers at death would be deductible on the decedent’s estate tax return.

  • Transfers to irrevocable trusts
    A transfer of appreciated property to an irrevocable trust would also be a deemed sale and subject to income tax. This means that upon funding of an irrevocable trust, the grantor will have a tax recognition event on the built-in gain, despite no actual sale occurring.  The kicker here is that the proposed act also seeks to eliminate any reduction in the fair market value of the transferred assets for a minority interest.

  • In-kind distributions to beneficiaries
    Not only will the transfer to the trust be subject to income tax, but should an appreciated asset be transferred to a beneficiary or another trust via a decanting, the trust will recognize gain on that transfer.

  • Other deemed sales
    Finally, trusts (and other entities) that own property will have a recognition event on unrealized appreciation of that property if the property has not been subject to a recognition event in 90 years. The holding period for this provision starts with January 1, 1940, making the first taxable event to occur on December 31, 2030.

If there is any good news in these provisions, it is that the step up in basis rules survived and to a limited extent will apply to transfers made by gift, less the $1 million exclusion.

What does this mean for estate planning as we know it? It may make Grantor Retained Annuity Trusts (GRATs) a less attractive tool for transferring appreciating assets, since gain is going to be recognized upon the funding of the GRAT. The funding of trusts with appreciated assets may in fact stop altogether. If a gain is going to recognized on the funding, it may make more sense to sell the assets, contribute the cash to the trust and let the trust invest those funds. Since transfers to spouses and charities are exempt from these deemed sales rules the funding of SLATs (Spousal Life Access Trusts) or charitable lead trusts may become more popular.

The key takeaway here is that even though the exemption is not being reduced, if you are considering establishing trusts for the benefit of future generations, it probably makes sense to do it now before these potential changes take effect.


About Christopher D. Wright

Christopher D. Wright

Christopher D. Wright, JD, CPA, Partner in the Private Client Services Group at Marks Paneth LLP, focuses on estate planning and gift, estate and trust taxation. With over 30 years of experience in accounting, tax and nonprofit organizations, Mr. Wright is adept at working with clients and their professional advisors to assist in developing estate plans that provide both estate tax savings and efficient transfer of assets to the next generation and to charitable organizations.... READ MORE +


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