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Proposed Changes to Estate and Gift Taxes Need Your Advance Planning Attention

June 28, 2021 by

Congress has proposed major federal estate and gift taxation changes for 2022. Given the breadth of the legislative reform, some advanced tax planning will most likely be necessary to reduce your family’s increased tax exposure. Fortunately, most of its provisions would not take effect until January 1, 2022, so you will have a brief window to plan and implement accordingly.

Estate/Gift Tax Exemption
The estate/gift tax exemption as currently proposed would receive an unfavorable adjustment under the proposed legislation. The current combined estate and gift tax exemption of $11,700,000 per person will be reduced to an estate tax exemption of $3,500,000 per person, plus a gift tax exemption of $1,000,000 per person.

This is nearly a 300% decrease in the tax-free estate/gift benefits. For those looking to benefit from the higher exemption before the revised amounts beginning in 2022, it should be noted that current tax rules prohibit any lifetime gifts from being limited by subsequent legislation. In practice this rule is known as a “claw back” and means that if you have already given more than the revised exemption amount before 2022, the excess does not become taxable, under current law. Therefore, for those with estates above the proposed threshold amount, our advice is to start looking into planning options with your CPA or attorney in order to maximize your benefit should the legislation pass as proposed.

Estate/Gift Tax Rate
For amounts above the estate tax exemption threshold, the proposed changes are set to increase the estate/gift tax rate from 40% to a graduated rate scale that begins at 45% up to $10-million with graduated rate increases thereafter as estate size increases, going as high as 65% for anything over $1-billion.

Annual Exclusion
The existing annual exclusion of $15,000 per person, per recipient, could also see a reduction to $10,000 per donee. Do note that you can continue to gift unlimited amounts by making direct payments to educational institutions and medical providers for another person’s qualifying expenses. These payments do not count against your annual gift exclusion. The proposed legislation also targets the tax treatment of certain tax strategies that reduce taxable benefits. Such as:

  • Eliminating the use of an ‘Intentionally Defective Grantor Trust’, which is a planning strategy which resulted in a dichotomy where the contributed assets were removed from the grantors estate for estate tax purposes but not income tax purposes; under the proposal those assets will now be included in the grantor’s estate;
  • Eliminating valuation discounts for ‘non-business assets,’ which are those assets not actively utilized in the conduct of a trade or business;
  • Limiting the scope of valuation discounts for gifts of partnership and LLC interest, basing the discount ultimately on a formula derived from the value of the underlying assets; and
  • Accelerating the generation skipping transfer tax for trusts that terminate after more than 50-years.

We highly recommend that you reach out to your accountant or attorney to see what proposed changes may pertain to you to plan out tax saving strategies before the end of the year.

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