A recent commentary by Philip DeMuth in the Wall Street Journal suggested that a tax hike under a Biden administration would be quite severe. In addition to warning about income tax adjustments affecting rates and capital gains taxation, Mr. DeMuth cautioned that potentially significant changes to the estate and gift tax rules could substantially affect estate planning in the future. Because of this, we believe each estate plan should be carefully reviewed so as make sure substantial assets are not exposed to unnecessary estate taxation.
The possible changes may include:
- The reduction of the estate and gift tax exclusion and generation skipping transfer tax exemption from $11,580,000 to $3,500,000.
- Increasing, from 40% to 77%, the current maximum estate tax rate.
- Limiting the $15,000 annual gift exclusion for unlimited donees to only two donees per year.
- Substantial limitation of valuation discounts.
- The use of excellent estate planning techniques known as Grantor Retained Annuity Trusts (a “GRAT”) and Defective Grantor Trusts (an “IDGT”) may be substantially curtailed.
While we cannot predict how many of these proposals might be enacted into law, given the substantial federal deficit and the current political environment, at least some of these potential changes may come to fruition. There are steps one can take now to minimize the impact of these potential changes.
A review of your current plan might suggest a number of opportunities to minimize future estate and gift taxes. Here is a brief description of some techniques one might consider:
- Substantial gifting now to make use of the current exemptions. Under current regulations, if the exemptions decrease, and if the larger exemptions had previously been used, they are not “clawed back” for estate tax purposes. The assets subject to the gifts in excess of the amount to which the exemption will be reduced escape future taxation.
- Current gifting can take advantage of discounts available under current law and remove from the taxable estate both the value of the discount and future appreciation on the gifted assts. A GRAT or an IDGT may be particularly effective in this regard.
- Certain charitable techniques may make sense with these potential changes looming on the horizon. We appreciate that many clients may not be comfortable with large charitable gifts. However, any client who has a taxable estate has a charitable gift to the federal government in the amount of the tax lurking within their estate plan. There are vehicles that can be used to convert what would otherwise be a charitable gift to the federal government into a charitable gift controlled by your heirs.