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Actions to Consider in Light of Proposed Legislation Impacting Estate Planning

The proposals most relevant for estate planning are:

  1. Reduction of the estate, gift and GST tax lifetime exemption from the current $11.7 million to $5 million indexed for inflation. This change would be effective after 12/31/21 so the 2022 exemption would be approximately $6 million. Any gifting that would exceed this level should be completed prior to 12/31/21.
  2. Estate inclusion of Grantor Trusts created or added to after the date of enactment. This severely limits some very popular estate planning tools. Although existing Grantor trust would be grandfathered, certain actions would still cause them, or a portion of them to be included in the grantor’s gross estate such as additional assets contributed or termination of grantor trust status.
    1. Grantors with existing life insurance trusts (ILIT) should consider prefunding several years of premiums into a noninterest bearing trust checking account to avoid potential inclusion of a portion of the trust in the gross estate due to future contributions. This may have been an unintended result of the legislation, but a fix is not assured.
    2. Anyone considering creation of a Grantor retained annuity trust (GRAT) or spousal lifetime access trust (SLAT) should move quickly to create and fund the trust before enactment.
    3. Anyone considering terminating Grantor trust status for an existing trust should act now if they are certain that is the best course of action for them.
  3. Sales to a grantor trust would be subject to income tax. Currently, a sale to a grantor trust is considered a sale by the grantor to themselves so there is no tax impact. Such transactions would be treated like sales to third parties and be taxable to the grantor if entered into after the date of enactment. Again, transactions in process should be completed as quickly as possible before enactment.
  4. New limits on valuation discounts would make discounts apply only to the operating assets of an entity. Currently an interest in an entity funded with an operating company or property as well as investment assets is valued based on the overall entity with discounts applied for things such as a lack of marketability or minority interest restrictions. The proposal would allow such discounts only on the operating assets. The non-operating assets would be valued as if transferred directly rather than as part of a legal entity.

Of course, these proposals may be subject to significant negotiation and may not pass in their current form. Any individual considering taking advantage of the opportunities available under current law should consult with their tax advisors immediately as the window could be closing shortly.

If you have any questions regarding your specific situation, reach out to our experts today to further discuss.