Property planning switch tax modifications on the horizon

The big question in the estate planning world today is whether, when, and to what extent Congress will make changes to gift, estate, and income tax laws. Given the many challenges facing the new Biden administration and tightly democratic Senate, key tax laws may not be considered even in 2021. Still, the tax proposals approved by the Biden government provide clear signals of action customers should consider this year.


  • The time to give is 2021 – change is on the horizon.

  • The timing and extent of possible changes to the gift and estate tax laws are unclear.

  • Some possible changes include: reducing the exemption, increasing the estate tax rate, increasing the capital gains tax rate, and eliminating the base adjustment.

  • Consider securing the $ 11.7 million exemption by giving gifts to irrevocable trusts and continuing to take advantage of the low interest rates to shift the appreciation of your estate using techniques like GRATs and intra-family loans.

  • Retrospective changes are unlikely; Changes are expected to take effect on January 1, 2022 at the earliest.

Possible legal tax changes with the greatest impact on the asset transfer

During the election campaign, President Joseph Biden proposed reducing the current exemption amount from $ 11.7 million to $ 3.5 million per person and increasing the estate tax rate from 40 percent to 45 percent for amounts in excess of the exemption . The exemption from the $ 3.5 million exemption is ambitious given the need for support from moderate Democrats with large Republican bases alone. Instead, Congress can simply fall back on $ 5 million adjusted for inflation. This was the amount of exemption prior to the substantial increase decided under the Tax Cuts and Jobs Act of 2017 (TCJA).

For what it’s worth, the exemption has never been lowered. Even so, the doubling of the exemption under the TCJA was a dramatic departure from previous guidelines. Reducing the exemption to $ 5 million, adjusted for inflation, therefore seems easier to negotiate. In other words, Congress could choose to treat the last four years as a fluke and return to “normal”.

The Biden team also signaled during the campaign that it would seek to remove the base increase on death and tax capital gains as decent income. Although the base increase is an income tax planning concept, it also plays an important role in transfer tax planning. Under current law, gifts with low base wealth can be detrimental because the recipient receives the base of the donor. Taxpayers often choose to keep certain low-base assets rather than selling or giving them away to get the base high on death. The family members or trusts receiving these assets can then sell those assets with little or no capital gains tax.

The Biden campaign suggested eliminating this base adjustment. An alternative proposal involves treating the transfer of valued property upon death or gift as a taxable event leading to the recognition of the gain. Commentators think this is unlikely, however.

The Biden campaign’s proposal to tax long-term capital gains and qualified dividends as ordinary income on any income above $ 1 million would further exacerbate the effects of undoing the base top-up. It is also possible that Congress could increase the current highest normal income tax rate from 37 percent to 39.6 percent.

Planning for the coming year

This year is an opportune time to make the most of your inheritance and gift tax exemptions and the low interest rate environment.

“Include” the tax exemption for estate and gift taxes

Many high net worth individuals have taken advantage of most, if not all, of their exemptions. Under current tax laws, individuals can give up to $ 11.7 million during their lifetime in 2021 ($ 23.4 million for married couples). If the exemption is reduced from $ 11.7 million to $ 3.5 million and the estate tax rate is increased from 40 percent to 45 percent, the cost of inaction is nearly $ 3.7 million (if a person receives a gift of Makes $ 11.7 million while the exemption is $ 3.5 million and gifts in excess of the exemption are taxed at a rate of 45 percent resulting in gift tax of approximately $ 3.7 million $ 7.4 million for married couples. If individuals and married couples have not used their exemption (s) and can afford it, they should seriously consider adding gifts to their remaining exemption ( en) in 2021, ideally an intergenerational trust for the benefit of their offspring.

Depending on your and your goals, circumstances, remaining exemption, and your family’s cash flow needs, it may not be possible to gift up to $ 23.4 million, or even $ 11.7 million, to a trust for your beneficiaries. A long-accepted way to address this issue is to create a trust that will benefit both the spouse and descendants of the fellow. These are commonly referred to as Spousal Lifetime Access Trusts (SLATs). A SLAT is a simple and effective method of meeting the potential needs of the older generation for access to transferred property. It provides direct access for the beneficiary spouse and indirect access for a grantor spouse. Grantor trust provisions, such as those that allow the trust’s grantor to exchange assets or borrow from the trust, provide tax flexibility and access to credit funds.

SLATs have become so popular that couples have created mutual trusts. This is not without risk and should only be done with different trust terms and with the creation of time-separated trust relationships. Finally, it’s important to remember that potential estate tax savings should never be the sole driving force behind your financial planning decisions. Individuals who have stretched thin to give meaningful gifts sometimes have deep “gifter regrets.” So make gifts when you can, but more importantly, make them when you want to.

Freezing the size of the property

Perhaps you and your spouse have already made use of your exemptions and are looking for ways to further reduce the tax burden on your estate, or you may not be ready to make large transfers of your property. Either way, an excellent alternative is to freeze the growth of your estate using strategies like Grantor Retained Annuity Trusts (GRATs) and installment sales with trusts or family loans. GRATs and installment sales performed well in the low interest rate environment (as we discussed earlier), as the assets of GRATs, or the interest rate on a bond, have often increased above the annuity rate. Thus, these strategies essentially “freeze” the size of the estate and transfer a significant appreciation from the customer’s estate that would otherwise have remained in the customer’s estate.

Planning doesn’t rule out uncertainty

It is entirely within the power of Congress to make retroactive tax laws when they are rationally related to a legislative purpose, but on a practical level, Congress usually avoids doing so. It’s almost always unpopular and only adds nominal additional revenue for budgeting purposes. Biden administration officials have previously stated that they are not interested in seeking retroactive tax changes.

Given the low likelihood, the risk of retrospective changes in tax law should not prevent clients from implementing new estate planning strategies. For those who remain concerned, a number of strategies can be structured to limit the potential gift tax liability in the unlikely event that legislative changes go into effect retrospectively. In 2021, customers should consider reviewing their existing plan to see if they can employ certain strategies to maximize the use of their exemption and meet their planning goals.