With a lot tax laws making its means via Congress, it might be time to start out enthusiastic about the best way to assist your shoppers play protection in opposition to potential tax hikes. The property planning methods mentioned under might assist rich shoppers mitigate the affect of the tax proposals at present gaining traction on Capitol Hill.
In fact, as with all property planning choice, it’s essential in your shoppers to seek the advice of with a professional lawyer earlier than taking motion. That mentioned, this info could enable you to educate your shoppers, together with high-net-worth (HNW) shoppers, in regards to the potential affect of tax modifications on their property plans.
How May Tax Modifications Have an effect on Property Planning?
The lifetime federal property tax exemption is at present $11.7 million per particular person. Your HNW shoppers could also be involved whether or not they’ll have the ability to use this massive exemption in 2021. As of this writing, the reply is more likely to be sure. A direct discount is not a part of two payments at present into account by Congress: the American Jobs Plan and the American Households Plan.
One other invoice, the For the 99.5 % Act, does embrace present and property tax modifications, but it surely doesn’t try to make these modifications retroactive. Accordingly, taxpayers ought to have the ability to make use of the $11.7 million lifetime property tax exemption in 2021. The IRS has confirmed that, if taxpayers correctly use this exemption throughout years with the next threshold, they won’t be penalized in the event that they die when the exemption is decrease.
4 Property Planning Methods to Mitigate Tax Hikes
As a result of the payments talked about above are making their means via Congress, their particulars aren’t set in stone. But when your shoppers are fascinated with the best way to play protection in opposition to potential tax hikes, right here’s what they should learn about some essential property planning methods.
1) Grantor trusts. Usually referred to as “deliberately faulty grantor trusts,” these trusts supply a simple means to make use of the lifetime property tax exemption and preserve property within the household. An irrevocable belief may be set as much as profit kids whereas permitting the belief to be taxed to the grantor for revenue tax functions. This gives the multifaceted benefit of eradicating property from the shopper’s property and serving to safeguard asset development from the annual tax burden. Cost of the taxes by the grantor isn’t handled as an extra present to beneficiaries.
Notably, the 99.5 % Act and the Smart Taxation and Fairness Promotion (STEP) Act would considerably curtail the advantages of those trusts. As proposed, funding a grantor belief wouldn’t take away property from the grantor’s property and would set off a capital positive factors realization occasion. The payments seem to grandfather grantor trusts that exist earlier than the efficient date of the enacted laws.
In case your shoppers wish to add this element to their property plan, they might want to think about creating and nominally funding such a belief as quickly as potential. Further funding could possibly be organized later when the ultimate laws turns into clearer, or property funded into the belief could possibly be exchanged later for different property.
2) SLATs and ILITs. Spousal lifetime entry trusts (SLATs) and irrevocable life insurance coverage trusts (ILITs) deal with combining wealth switch techniques with leveraging and defending property values. Sometimes, each varieties of trusts personal massive life insurance coverage insurance policies and periodically obtain presents from the grantor to cowl their equally massive premium funds. These contributions may be structured as bigger presents that burn up the lifetime property tax exemption or the annual present tax exclusion ($15,000 in 2021).
SLATs are designed to permit the nongrantor partner to entry and profit from built-up money values in life insurance coverage insurance policies. SLATs and ILITs present revenue tax–free demise advantages as a result of the profit is paid exterior of the grantor’s property. In some very massive estates, these demise advantages would possibly assist shield different property by offering liquidity to pay property taxes.
The affect of congressional payments on these trusts could possibly be dramatic. For one factor, SLATs and ILITs are sometimes grantor trusts, which means the problems mentioned above would apply. Though the trusts may be grandfathered, the proposed legal guidelines would apply to any new contributions—which can pose an issue as a result of common contributions happen by design for a lot of of those trusts.
To plan forward, one choice which may be value your shoppers’ consideration is to prefund these trusts to permit the trustee to pay up the coverage, a technique that might use the property tax exemption this yr whereas the brink is excessive. It could additionally seem more likely to absolutely grandfather the belief for the longer term.
3) GRATs and FLPs. Grantor-retained annuity trusts (GRATs) and household restricted partnerships (FLPs) are quite common property freeze techniques. They let grantors take away future development from their property whereas nonetheless probably receiving ongoing advantages from the property. Each GRATs and FLPs may be designed to make use of little or no property switch tax exemption.
The 99.5 % Act explicitly targets GRATs, mandating that they should be greater than 10 years in length and depart no less than the higher of 25 p.c of the market worth or $500,000 to the rest curiosity. This might get rid of the widespread technique of utilizing GRATs briefly, rolling increments. Subsequently, 2021 may be the ultimate yr to maneuver important money or extremely considerable securities out of a grantor’s property.
Likewise, the 99.5 % Act introduces limitations to low cost valuation guidelines—most notably focusing on entities resembling FLPs and LLCs by stopping a reduction in instances the place any member of the family continues to regulate the transferred entity. It could get rid of the long-standing apply of methodically transferring FLP pursuits to the subsequent era utilizing annual valuations at minority and marketability reductions.
As with ILITs, transferring massive parts of an FLP in 2021—in case your shopper nonetheless has massive exemptions to make use of this yr—could also be one thing they need to think about and talk about with their lawyer or tax skilled. It’s value noting, nevertheless, that the 99.5 % Act might get rid of the attractiveness of future FLPs.
4) Contingent planning. Given the uncertainty relating to congressional approval of tax modifications, your shoppers would possibly think about creating contingent presents and trusts via a wide range of authorized mechanisms. Within the case of presents to trusts for spouses, for instance, it’s potential to create a lifetime certified terminable curiosity property (QTIP) belief. Since a QTIP election is due similtaneously a private revenue tax return, this strategy permits time to see what turns into regulation in 2021.
If no important modifications happen, your shoppers can decline to file the QTIP election with their tax return in 2022. Relying on how the lawyer drafts the belief, this choice would almost definitely bypass a partner and fund a belief for descendants, utilizing any future will increase within the present and property tax exemption.
Equally, trusts can grant useful choices and powers whereas we await the end result of 2021 laws. One such choice permits an influence holder to train a disclaimer and ship property again to the grantor of a belief. Since certified disclaimers should be made inside 9 months of the disclaimable curiosity’s creation, an influence holder might wait till 2022 to make this choice.
The Worth of Steerage
Congress remains to be within the early levels of the legislative negotiation course of for the payments proposing tax modifications. So, whether or not your shoppers are involved about the best way to play protection in opposition to potential tax hikes—or even when they haven’t been paying consideration—you may present precious schooling by initiating a dialogue on this matter. And, in fact, it’s best to advise shoppers to hunt an lawyer’s help to make sure that their property planning methods are updated with federal and state tax codes and new legal guidelines.
