September 17, 2021

Late in the evening on September 10, the House Ways and Means Committee released an extensive tax package. The most highly publicized components are the increases in the top tax rates for ordinary income (to 39.6 percent) and capital gains (to 25 percent). But there are two significant estate/gift tax components as well.

Each person has an estate/gift tax “exemption” that can be used either during lifetime or at death. This exemption is currently $11.7 million per person. A 40 percent federal estate tax (in addition to any applicable state estate tax) may be imposed on estates that are above the exemption. Under current law, the exemption is scheduled to be reduced by 50 percent in 2026. However, the new proposal would move up the date of the 50 percent reduction to January 1, 2022, meaning that individuals would only have until the end of 2021 to use the current exemption. To take advantage of this, an individual would need to make gifts of more than $5.85 million by the end of 2021. Those with sufficient assets would ideally make gifts to utilize their entire $11.7 million exemption.

Second, the proposal would essentially eliminate one of the most useful estate tax planning techniques available: the intentionally defective grantor trust, or “IDGT.” Many trusts used in estate planning, such as spousal lifetime access trusts, or “SLATs,” are considered IDGTS. (More information about SLATs is available here.) An IDGT is a type of trust that is considered to belong to the grantor for income tax purposes but is outside of the grantor’s estate for estate tax purposes. This is beneficial because the grantor can 1) in effect, make tax-free gifts by paying the IDGT’s income tax liability, and 2) sell assets to the IDGT (often at discounted values) without creating a realization event for income tax purposes. The new proposal would cause the assets of an IDGT to be “brought back” into the grantor’s estate for estate tax purposes, thereby eliminating the IDGT’s usefulness. However, the new proposal would grandfather in IDGTs that are created and funded before the bill is enacted (i.e., when it is signed by the president), but not with respect to contributions made thereafter.

Finally, the proposal would eliminate the use of valuation discounts for gifts (other than gifts of interests in active businesses). This would eliminate the opportunity to “leverage” gifts using these discounts.

All of the above are of course only proposals. They may not pass at all or may be changed substantially before they are passed. However, if these proposals do pass in anything like the current form, the impact on estate tax planning will be enormous. Because of this, any taxpayers who have been planning to make gifts before the exemption is reduced should act quickly, for three reasons: 1) to use the extra $5.85 million of exemption before it disappears, 2) to take advantage of the ability to use an IDGT while it is still possible, and 3) to utilize applicable valuation discounts while still available.

To learn more about this or any other estate planning topic, contact a member of Much's Wealth Transfer & Succession Planning group.

This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under applicable rules of professional conduct, this content may be regarded as attorney advertising.