The Democrats in Congress have recently put forth a proposal that could affect a lot of people with estate tax and related estate and gift tax issues. I want to go ahead and take the time to just kind of go over their proposal and some of the options you may have if you find yourselves affected by any changes that might go into effect. But before I get too much into the details, I do want to stress that this is only a proposal, and it has not passed yet and is not currently the law. I just want you to have a heads up as to what potentially could come down the line if they’re able to secure enough votes to pass all of these things that they’re wanting to accomplish and if it does become the law, we will have a short window of time to take action and sufficiently protect your assets.

OK, so a few points of interest. Right now, the estate tax credit, meaning how much a US citizen can pass to their family or to anybody without paying estate tax is $11.7 Million dollars, so that’s really $10 million adjusted for inflation. This current law is set to sunset or expire at the end of 2025, so January 1, 2026. That means that the estate tax credit would go back down to $5 million (adjusted for inflation), per person. That would happen in 2026, whether or not the Democrats’ current proposal gets some life breathed into it or not and that’s something we still need to be aware of and keep in mind. This proposal is wanting to accelerate the expiration of the current law. One of the things that they’re doing as of January 1, 2022, is reducing the estate tax credit to $5 million (adjusted for inflation) which would put us at about 6.2 Million dollars of estate tax credit. Now that’s still going to cover a lot of people, but for those that are on the edge and closer to the $10 million mark, and with assets over 6.2 Million, they will want to make sure that they take a look at this very closely and maybe start putting some tax planning into effect before they lose some windows of opportunity.

Now the good news is the gift tax. The annual gift tax credit does not seem to be being affected. It is currently $15,000 per donor, per donee, per year. That means you can give $15,000 per person per year free of the gift tax, and so that would pass outside of your estate. That’s one of the things that will continue to be favorable and something that we can look at as an option. The gift tax is set to adjust in 2022 to $16,000 and that is a little bit of good news.

What should we take away from just these two particular points? Well, what we need to realize is that the $11.7 Million dollar estate tax credit is inevitably going to go away, and the party is going to end, whether it’s at the end of this year or at the end of 2025. If you see yourself in this scenario, we need to start bringing you into the office and begin to evaluate if this something that is going to affect you. You need to ask yourself how the increase in your real estate values, your investments or the if the increase in the value of your business will affect you. What does your estate look like right now? Are you going to be hit with an estate tax problem? This needs to be addressed and the best way to do that is for us to sit down with your personal financial statements, maybe even with your CPA, to discuss where you are and see what kind of gifting options you have now before any changes in the law actually occur.

There is some good news in this proposal. There is a qualifying farm property credit, meaning you could get a valuation discount of up to $750,000. The proposal would put it up to $11.7 Million for farm property that’s eligible and there’s certain restrictions. That might help a few people and it’s something that, obviously if we have that available, we want to make sure that that we have that covered.

The other thing that really is even more important or more urgent to be looking at your estate plan for tax purposes is the estate taxation of grantor trusts and the sale of assets to grantor trusts. These are some advanced techniques that we use to freeze the estate value and we pass the estate onto to your beneficiaries. Typically, these would be one of the methods we would use for taxable estate. At this point, the Democrats are proposing to limit the ability for us to use some of these things. So, in a typical situation, we would transfer assets to a trust that is going to be treated as a grantor trust. Now, what that means is that the grantor, the person transferring the assets into the trust, will make a gift of that to the trust, but they will still remain responsible for the income tax. The income tax at the personal rate is much more favorable than the trust tax rate. That being said, they’re trying to eliminate that tool, so their proposal basically takes the grantor trust status out of the trust. In the past, the income tax paid would not be considered a gift or an additional gift to the trust, but under the new rules, you would not be able to pay the income tax or have the tax responsibility and still have the assets pass outside of your estate because you would have already paid gift tax. Furthermore, the transfer of the assets to the trust would be considered a taxable event. So, there’s a lot of hamstringing of options that are in this most recent proposal which will really affect grantor retained annuity trusts, qualified personal residence trusts and even irrevocable life insurance trusts. These are some of the tools that are often used for taxable estate and the Democratic Party in Congress is really pushing the ability to pass on wealth with the reduced estate tax risk and this is a big thing that we need to be aware of. If you find yourself in this scenario and if this were to take effect January 1, 2022, and you have not yet put a plan in place and funded and completed by the 31st of December 2021, you and your estate will be subject to the new rules. So that’s going to be a really key reason why we need to accelerate taking action now.

OK, so another blow to the estate tax planning process is that the valuation for non-business assets is going to change. The proposal will require a different treatment. Right now, if you pass to your family limited partnership and you make gifts of real estate that may be subject to a triple net lease, meaning you don’t really have to do anything, the money just gets deposited and the tenant takes care of everything else, or it has marketable securities that also don’t involve any actual action; they are considered passive assets, and they’re considered non-business assets. Under the current law, you could take certain discounts in valuing them. Valuing them for lack of marketability because what you’re actually gifting is a limited partnership interest or an LLC membership interest that is not readily available to sell in the open market. That discount and other discounts, such as lack of control, having a minority interest discount, and other discounts are going to be disallowed under this new proposal for anything that is a passive asset. So being able to take discounts could reduce, conservatively 35% of the value of the assets being transferred. That tool is just not going to be available if this particular proposal passes the House and Congress and becomes law and I anticipate that not being able to take those discounts is really going to have a major effect on some people.

I know that some of the stuff that I’m talking about is more high level, more technical and may not apply to everybody. But as I mentioned before, if this proposal that is moving along the Congress does become law, we will have a very short window to react to.

If you anticipate having an estate tax issue or you just want to find out what your estate valuation would be, give us a call. I will be happy to visit with you.

It’s extremely important to start getting ready for this. It’s going to happen whether it happens in 2022 or 2026. Take steps to restructure put yourself in a position to be able to benefit your heirs and not have to have our Uncle Sam be your largest beneficiary. Don’t let this slip away. If this proposal does take effect, if they make this law, it is going to be extremely difficult to be able to pass wealth on without being subject to that estate tax and a lot of the planning tools that we currently use in tax planning are going to be limited. Also, another thing you can do is reach out to your congressmen. If you don’t like what this sounds like, it’s still not law.  A lot of stuff can change between now and the end of the year. All right. Thank you and until next time, I’m at your service.

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