Estate Taxes: What You Can Do to Prepare for The New Proposed Estate & Gift Tax Changes

President Biden’s Build Back Better spending plan includes several changes to the current gift and estate tax rules currently in place. Many of these changes could be effective as early as January 1, 2022.

Overview of Proposed Changes

One proposed change would be to reduce the lifetime gift and estate tax exemption in half starting next year. The current exemption is $11.7 million ($10 million inflation adjusted), under the proposed rules the new exemption amount would be just under $6 million. This would essentially accelerate the sunset provisions on the estate tax exemptions that were supposed to happen as of January 1, 2026 under the Tax Cuts and Jobs Act.

Another proposed change would impact the taxation of grantor trusts. Grantor trusts in place by the end of 2021 would be grandfathered as to the tax benefits of these trusts. Grantor trusts established after the end of 2021, or additions to an existing grantor trust, would now count as a part of the grantor’s estate and face other tax issues.

Additionally, valuation discounts on the transfer of minority equity interests for partnerships and other private entities holding passive investments might be in jeopardy as well.

Estate Tax Planning Issues Before Year-End 2021

As far as the potential reduction in the estate tax exemption, this might prompt some taxpayers to accelerate the gifting of assets to their heirs prior to year-end. However, any portion of the $11.7 million not used if the new law passes will be lost. For example, if you were to give $7 million to your heirs in 2021, the remaining $4.7 million would be lost to you if the rules change and the exclusion limit is lowered. This would also be the case under the current plans for the exclusion limit to revert to lower levels after the 2025 tax year.

For those with estates that will be smaller than this or even than the proposed new limits this is not a big deal. For those who are wealthier and who are not in a position to take full advantage of the current limits in 2021, they will need to revisit their future estate planning strategies.

In the case of a grantor trusts, the proposed rules would grandfather trusts established and funded prior to the effective date of the new rules if passed. This would also apply to related promissory notes. We anticipate that many estate planners and wealth managers will be busy with wealthy clients looking to put these trusts in place and related planning work prior to the end of 2021.

Charitable Giving

A Charitable Lead Annuity Trust (CLAT) is similar to a Grantor Annuity Trust (GRAT) except that the payments are directed to a charity. Anything remaining after the term of payments would revert to family members without being considered a gift.

It is unclear whether or not CLATs would be impacted by the proposed new rules. This uncertainty applies to some other types of trusts as well. For those considering a CLAT, it probably makes sense to get this in place prior to year-end to avoid any limitations that might surface in the final rules if passed.

How You Can Prepare

Many investors meet with their advisors towards year-end in most years. With the potential changes outlined above, plus a number of others in the works, these meetings take on added importance this year.

If you are considering a grantor trust, a large lifetime gift, using valuation discounts to pass on certain private investments or a host of other estate planning options you may want to get these plans in place prior to the end of 2021 to avoid changes that could be enacted as early as January 1, 2022.

Moreover, you will want to sit down with your advisor team to determine if any of these strategies are the best way to proceed. It can be a bad idea to take action just to beat a deadline if those actions are not in the best interest of your overall situation and objectives.

This is a good time to contact your Wedbush advisor to discuss your overall year-end planning.

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These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.