Significant Tax Law Changes Proposed – Potential Impact on Your Estate Planning
New legislation has been proposed which will, if it becomes law, cut the estate and gift tax exemption in half, eliminate valuation discounts, and make many traditional estate planning techniques obsolete. While no one can predict with certainty whether this proposed legislation will pass, you should strongly consider acting now if you want to take full advantage of currently available estate planning techniques. See the following discussion for more details.
The Bad News
Gift and Estate Tax Exemption Would be Cut in Half
For 2021, the estate and gift tax lifetime exemption amount stands at $11.7 million per person (and $23.4 million for married couples). However, the proposed legislation would effectively cut these amounts in half beginning on January 1, 2022. For that reason, we are encouraging our clients who wish to make large gifts to their loved ones to strongly consider acting before year’s end to lock in the benefit of the current higher exemption amounts.
FLP Valuation Discounts Would be Eliminated
Substantial lifetime gifts can quickly exhaust the gift and estate tax exemption available to individuals with large estates. One common estate planning strategy to reduce the impact of lifetime gifts on the available exemption is to contribute liquid and passive assets to a family limited partnership (an “FLP”) and then to make gifts of FLP interests – rather than the assets themselves – to their children and other family members. For reasons beyond the scope of this memo, FLP interests are valued at a discount for gift and estate tax purposes. Therefore, this strategy enables individuals to pass more their estates to future generations on a tax-free basis. However, if the proposed legislation is enacted in its current form, this discounting strategy will be eliminated effective as of the date of its enactment. Therefore, we are encouraging clients who wish to utilize this strategy to act now.
“Grantor” Trusts Would be Made Obsolete
The use of certain trusts (known as “grantor trusts”) is
essential to many advanced estate planning techniques, including techniques to pass family businesses to future generations during life free of income, gift, and estate tax liability. However, if the proposed legislation is enacted in its current form, the tax benefits of utilizing grantor trusts in these transactions will be eliminated. Therefore, we are encouraging clients with family businesses to consider taking advantage of these techniques now before the use of grantor trusts in these transactions is made obsolete.
The Good News
“Step-up” in Basis Retained
Many expected the proposed legislation to change current law regarding the “step up” in basis on assets owned at death. In effect, the basis step-up rule makes it so that the beneficiaries of an estate can sell inherited assets without paying capital gains taxes on the amount that those assets appreciated during the life of the deceased owner. However, the proposed legislation does not include any changes to this rule.
A Significant Benefit for Farmers and Ranchers
For purposes of calculating the value of an estate – and therefore for determining the amount of estate tax owed – the general rule is that all property is valued based on its “highest and best use.” For farmers and ranchers, that means the IRS values their land based on how much a developer would pay for it – not the value of the land if it were to continue to be used for farming or ranching. Because this valuation method would potentially force the beneficiaries of farmers’ and ranchers’ estates to sell off their land to pay these taxes, Congress many years ago enacted legislation providing some limited relief in this area. Effectively, if the beneficiaries of farmers’ and ranchers’ estates commit to continuing the business, current law permits the fair market value of their lands to be reduced, for estate tax purposes, by up to $1.19 million. The proposed legislation increases the maximum valuation reduction nearly tenfold to $11.7 million.
Disclaimer: This information is made available for educational purposes only, as well as to give general information and a general understanding of the law, not to provide specific legal advice. For more information concerning this topic, please contact Casey Rickard with Branscomb Law at crickard@branscomblaw.com or (361) 886-3800.
