Fall Estate Planning Update

Adam J. Centner

Legislative Update

With less than 100 days until 2022, politicians seem intent on keeping all of us guessing as to whether significant tax legislation will be forthcoming by year-end. 

On September 13, just days after several Senate Democrats indicated there would be few changes to the estate tax regime this year, the House Ways and Means Committee released a proposal that, if passed, would result in drastic changes to the tax code across the board. 

Some of the more significant estate tax-related proposals from the Committee include:

• Reduction of the Federal estate tax exemption amount from the current $11.7 million per person to approximately $6 million (to be effective Jan. 1, 2022);
• Elimination of grantor trust benefits, to include: (i) upon the termination of grantor trust status, the grantor would be deemed to have made a taxable gift of trust assets; (ii) including grantor trust assets in the grantor’s gross estate for estate tax purposes, to be subject to estate tax at the grantor’s death; and (iii) subjecting sales between a grantor and a grantor trust to income tax (to be effective upon the date of enactment); 
• Elimination of valuation discounts for all non-business assets (to be effective upon the date of enactment); and
• Restrictions on further contributions and requirements for mandatory distributions for certain “mega-IRAs” with a value in excess of $10 million.

The ultimate fate of these proposals is far from certain. It is expected that any changes to estate tax laws will come only from Democrats’ budget reconciliation bill, but Democrats’ razor-thin margins in the House and Senate leave many guessing where the legislation will end up. If passed at all, it is likely to be reduced from the initial $3.5 trillion budget proposal, but the extent of any reduction and the effect it has on the Committee’s proposals has yet to be seen.

Immediate Planning Strategies

For clients concerned about a possible reduction in the Federal estate tax exemption amount in the coming months, now is the time to implement significant lifetime gifts. 

Married couples may consider spousal lifetime access trusts in which one or both spouses gift assets to an irrevocable trust for the benefit of the other spouse and descendants. The use of such a trust allows the client to utilize the current exemption amount prior to any reduction, and completed gifts to the trust, along with the growth of the assets, are exempt from future transfer taxes. Wealthy individual clients may consider a gift to an irrevocable trust for the benefit of descendants. Increased charitable planning may also make sense for charitably-inclined clients. 

Beyond the effect that a reduced exemption amount would have on estate tax planning, changes to grantor trust rules could significantly curtail the grantor trust-related benefits of spousal lifetime access trusts and other irrevocable planning trusts immediately upon the enactment of any new legislation.

Long-Term Planning Strategies

Under current law, the Federal estate tax exemption amount is scheduled to reduce to approximately $6 million in January 2026, even without changes to the law this year.

In light of this, it is always prudent to discuss other estate reduction techniques with clients. One of the easiest methods of reducing one’s estate is through the use of annual exclusion gifts to children, grandchildren, and others each year (or to trusts for their benefit). These gifts allow each client to gift $15,000 per year ($30,000 per married couple) to any number of individuals free of any tax consequence, and each gift of $15,000 saves a taxable estate $6,000 in estate tax.    

A future reduction in the Federal estate tax exemption is also certain to increase the use of irrevocable life insurance trusts (ILITs). An ILIT allows a client to pass the policy’s death benefit on to the trust beneficiaries outside of the client’s taxable estate, meaning the proceeds will not be subject to estate tax or use any of the decedent’s exemption. 

I hope you, your family, and your clients have an enjoyable and healthy fall. If you’d like to discuss these topics or other estate planning matters, or I can ever be a resource to you, please contact me at 513.579.6488 or acentner@kmklaw.com.