With a new Administration in town there are rumors everywhere about the “new Estate Taxes” and the “Loss of our Tax Exemptions”. What should you expect? What should you do to plan and prepare for possible changes?
Let’s start with your current estate tax exemptions amounts: Under current law you may give your children or others up to $11.7 million in assets ($23.4 million for a married couple). President Biden’s campaign proposal was to reduce the exclusion amount to $3.5 million each (for a total of $7 million for a married couple).
Will this change occur? We cannot predict a change with any degree of accuracy, but we can say there are a lot of potential tax dollars at stake for a marginally democratically controlled Congress to consider in the future. Will any tax changes be retroactive? While historically the majority of our tax changes have not been retroactive, we did experience retroactive changes (that were legally permissible) in 2010, so it could happen again. Best planning thought? Make all your changes EARLY, do not wait until Congress starts talking about the subject. Most frequently tax changes are in the Fall, so any Fall 2021 changes may not affect you, assuming we can avoid retroactivity.
Options for Minimizing Your Exposure to Estate Taxes:
If you have assets in excess of $7 million consider your options to shift wealth to others with Annual Gifts (which remain at $15,000 per donee for 2021) and additional gifts paid directly to educational and medical providers above those levels. Also consider making a large gift of a portion of your remaining lifetime credit (your “applicable exclusion amount”). While a large gift will use a portion of your lifetime credit, the IRS has indicated they will not “claw back” the credit amount in your estate if the exemptions fall.
Other options? Grantor Retained Annuity Trusts (“GRATs”) are attractive- this vehicle provides a great opportunity for you to give away most of the future appreciation of assets while still retaining an income stream. This technique works to your advantage when the assets you give to the GRAT grow in value at a rate larger than the rate the IRS tables assume the assets will grow. Currently the “table rates” are very low, so it is easy to achieve success. (The current rate is 0.6%). The lower the rate the more effective the GRAT becomes in reducing your estate taxes. When valuing your gift, the value of your retained income stream is subtracted from the assets placed in the GRAT, so the taxable gift is only the amount that is assumed to be left for your heirs after your income stream stops. To be effective you must outlive the term of the GRAT.
Family Limited Liability Companies (“FLLC”s) – A family LLC provides another option for you in the event you have closely held business interests or real estate assets (such as rental property). You can include your children and other family members as “minority owners” (i.e. owning less than 50% each) by making “discounted” gifts of your interests to them. If you wish to maintain greater control, consider making gifts of non-voting interests.
For these and other opportunities, check with your tax advisors, but hurry, we don’t know when any of these opportunities may change with future legislation.