President Biden’s New Tax PROPOSAL – A Window for Estate Planning May Be Closing
Every year represents a planning opportunity, but some years have more to offer than others. This is particularly true when tax policy is changing in Washington, as it is now. President Biden’s tax plan, as released by the House Ways and Means Committee, proposes significant changes to both income and estate taxes, as well as retirement plans. While every change is not guaranteed to make it through the budget reconciliation process, the window for taking action is shrinking by the day. This is because many of the new rules would take effect January 1, 2022 and some as soon as the date of enactment. This article focuses on the estate planning changes, since they are more time sensitive than the possible income tax changes.
From an estate planning perspective, there are several changes which stand out. These include:
- The estate tax exemption will be reduced by 50% to $5.85 million for individuals and $11.7 million for couples as of 1/1/2022
- Grantor trusts will be included in the decedent’s estate for estate tax purposes, effective upon enactment
- Sales or exchanges of assets between a grantor and trust will be a taxable event, effective upon enactment
- Valuation discounts of nonbusiness assets for transfer tax purposes will be eliminated
Of course, the first question to ask is whether these reforms are likely to affect you:
- Do you have excess assets above and beyond what you expect to need during your lifetime?
- Is your estate likely to be subject to estate taxes? (More than $5.85 million for an individual or $11.7 million for a couple.)
If the reforms affect you, there are some potential planning techniques which may help protect your estate from estate taxes. These include:
- Establish Grantor trusts: We expect that grantor trusts established and funded before the enactment of the new law will be grandfathered. Therefore, there is an opportunity to remove assets from your estate by forming and funding new trusts prior to enactment. There are many versions of this strategy which depend on the type of asset transferred, the beneficiary of the trust, and the exact terms of the trust.
- Use a family limited partnership: Consider transferring assets to your heirs now through a family limited partnership or other structures which allow discounted valuations, before the new law is enacted.
- Replace assets in trusts: If you have grantor trusts in place and you have a reason to move assets between the trust and your estate (for example, exchanging an asset for a note) do so before the new law is enacted.
Some of these strategies can be implemented quickly. However, forming and funding new trusts or other legal structures can take time, which includes analyzing your situation, defining your strategy, and drafting the required documents. While JMG does not draft legal documents, we can evaluate your situation and help determine whether any of these strategies may be applicable, discuss the pros and cons of each, and help you work with an attorney who can draft any required documents. Finally, and just as importantly, we will help you implement any strategy once the paperwork is in place.
These proposals are subject to revision as they move through the legislative process. You will want to consider the risks of moving quickly against the risks of waiting as it pertains to your specific situation.
If you are concerned that the estate tax rules may affect you, please call your JMG advisor.
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