With a lot tax laws making its method by way of Congress, it could be time to start out serious about assist your shoppers play protection in opposition to potential tax hikes. The property planning methods mentioned beneath may assist rich shoppers mitigate the influence of the tax proposals presently gaining traction on Capitol Hill.
After all, as with every property planning choice, it’s vital in your shoppers to seek the advice of with a certified legal professional earlier than taking motion. That stated, this info could enable you educate your shoppers, together with high-net-worth (HNW) shoppers, in regards to the potential influence of tax modifications on their property plans.
How Might Tax Adjustments Have an effect on Property Planning?
The lifetime federal property tax exemption is presently $11.7 million per individual. Your HNW shoppers could also be involved whether or not they’ll be capable to use this huge exemption in 2021. As of this writing, the reply is prone to be sure. A right away discount is not a part of two payments presently into consideration by Congress: the American Jobs Plan and the American Households Plan.
One other invoice, the For the 99.5 % Act, does embody reward and property tax modifications, however it doesn’t try to make these modifications retroactive. Accordingly, taxpayers ought to be capable 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 method by way of Congress, their particulars will not be set in stone. But when your shoppers are enthusiastic about play protection in opposition to potential tax hikes, right here’s what they should learn about some vital property planning methods.
1) Grantor trusts. Usually known as “deliberately faulty grantor trusts,” these trusts supply an easy method to make use of the lifetime property tax exemption and maintain property within the household. An irrevocable belief could be set as much as profit kids whereas permitting the belief to be taxed to the grantor for earnings tax functions. This gives the multifaceted benefit of eradicating property from the consumer’s property and serving to safeguard asset progress from the annual tax burden. Fee of the taxes by the grantor isn’t handled as an extra reward 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 aspects realization occasion. The payments seem to grandfather grantor trusts that exist earlier than the efficient date of the enacted laws.
In case your shoppers want 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. Extra funding might be organized later when the ultimate laws turns into clearer, or property funded into the belief might 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 ways with leveraging and defending property values. Usually, each forms of trusts personal giant life insurance coverage insurance policies and periodically obtain items from the grantor to cowl their equally giant premium funds. These contributions could be structured as bigger items that deplete the lifetime property tax exemption or the annual reward 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 earnings tax–free dying advantages as a result of the profit is paid outdoors of the grantor’s property. In some very giant estates, these dying advantages may assist defend different property by offering liquidity to pay property taxes.
The influence of congressional payments on these trusts might be dramatic. For one factor, SLATs and ILITs are usually grantor trusts, which means the problems mentioned above would apply. Though the trusts could 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 possibility that could be value your shoppers’ consideration is to prefund these trusts to permit the trustee to pay up the coverage, a method that might use the property tax exemption this yr whereas the edge is excessive. It might additionally seem prone to totally grandfather the belief for the long run.
3) GRATs and FLPs. Grantor-retained annuity trusts (GRATs) and household restricted partnerships (FLPs) are quite common property freeze ways. They let grantors take away future progress from their property whereas nonetheless doubtlessly receiving ongoing advantages from the property. Each GRATs and FLPs could 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 period and depart no less than the larger of 25 p.c of the market worth or $500,000 to the rest curiosity. This might remove the widespread technique of utilizing GRATs in brief, rolling increments. Subsequently, 2021 could 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 concentrating on entities comparable to FLPs and LLCs by stopping a reduction in circumstances the place any member of the family continues to regulate the transferred entity. It might remove the long-standing follow of methodically transferring FLP pursuits to the subsequent technology utilizing annual valuations at minority and marketability reductions.
As with ILITs, transferring giant parts of an FLP in 2021—in case your consumer nonetheless has giant exemptions to make use of this yr—could also be one thing they need to think about and talk about with their legal professional or tax skilled. It’s value noting, nevertheless, that the 99.5 % Act may remove the attractiveness of future FLPs.
4) Contingent planning. Given the uncertainty concerning congressional approval of tax modifications, your shoppers may think about creating contingent items and trusts by way of a wide range of authorized mechanisms. Within the case of items 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 concurrently a private earnings tax return, this strategy permits time to see what turns into legislation 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 legal professional drafts the belief, this choice would almost definitely bypass a partner and fund a belief for descendants, utilizing any future will increase within the reward and property tax exemption.
Equally, trusts can grant useful choices and powers whereas we await the end result of 2021 laws. One such possibility 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 may wait till 2022 to make this choice.
The Worth of Steerage
Congress remains to be within the early phases of the legislative negotiation course of for the payments proposing tax modifications. So, whether or not your shoppers are involved about play protection in opposition to potential tax hikes—or even when they haven’t been paying consideration—you’ll be able to present helpful schooling by initiating a dialogue on this matter. And, in fact, it is best to advise shoppers to hunt an legal professional’s help to make sure that their property planning methods are updated with federal and state tax codes and new legal guidelines.
