Will modifications to the tax law be retroactive?

Gift Tax written on piece of paper.


The Biden government has promised to reduce the uniform estate tax credit from $ 11.7 million to $ 3.5 million and the gift tax credit to $ 1 million. The question many planners ask is whether Congress has the political will to make these changes retrospectively: that is, they will apply to all gifts and rebates in 2021, not just those that happen after the changes are passed. Some commentators predict that there is not the political will to make the changes retrospectively and they may be right. However, the changes to inheritance tax will apply retrospectively to gifts in 2021, even if the legislation does not specifically provide for it to be retroactive. Here’s why and what you can do about it.

Some describe the $ 11.7 million as an exclusion from estate or gift tax when it isn’t – it is a credit to estate and gift tax applied under IRC section 2505, which corresponds to that Credit for estate taxes as if the donor died on the last day of 2021. Financially, if you gave the full $ 11.7 million in June 2021 and Congress lowers the estate tax credit to $ 3.5 on October 1, 2021, the tax credit for the gift will be retroactive to the June 2021, with the New tax rate of $ 3.5 million in lieu of the previous credit of $ 11.7 million.

This leaves customers open to very large gift tax invoices in 2021, potentially up to 50% of the value of the gifts transferred. What I recommend to our customers to secure the higher $ 11.7 million balance without running the risk of paying increased gift tax is to revoke the gift.

In order to reverse a gift when the tax becomes retroactive, irrevocable trusts must be used. Specifically:

· An irrevocable trust where one beneficiary has a disclaimer for all within 9 months of the gift being given;

A Spousal Limited Access Trust,

· A trust, the income of which is paid to a spouse and which enables an election for QTIP (Qualified Terminable Interest Property). The election will be made in the 2021 gift tax return, which will be filed in 2022.

Use a formula gift (either direct or fractional shares in LLCs where the available numerator and denominator exemption is the value of the gift finally determined for gift tax purposes, and

· Sell the assets to the trust, but take back a note and treat the transaction as an installment sale, paying back the principal amount of the bond over and above the tax credit.

None of these trusts are easy to implement and require careful planning. The cost and time it takes to set up a reversible gift is quite small compared to the potential gift taxes if and when Congress changes the tax credit rate.