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Taxpayers Need to Evaluate Estate Tax Plans Before Year End

Posted by : on : November 18, 2020 | 8:00 am

The 2020 presidential election brought possible future changes in the tax law that will demand immediate attention. Joe Biden has provided a tax platform (the “Biden Plan”) focusing on generating more tax revenue from both high-income and high-net-worth taxpayers; however, there are elements of his tax platform that may have a material impact on all taxpayers. This article provides a brief summary of his tax platform as it relates to estate, gift and succession planning issues.


Estate and Gift Taxes


  • Reduction of the $11.58 million Estate/lifetime exclusion. The current exclusion is scheduled to sunset at year end in 2025, thereby returning to the pre-TCJA exemption cap level of approximately $6 million. However, Biden could also adopt an item from the tax platform proposed by Hillary Clinton in 2016. This, of course, would mean more taxpayers subject to a transfer tax.


  Current Pre-TCIA 2016 Democratic Plan
Estate Exemption Equivalent $11,580,000 $5,800,000 $3,000,000
Gift Exemption Equivalent $11,580,000 $5,800,000 $1,000,000
Generation - Skipping Exemption $11,580,000 $5,800,000 $3,000,000


  • No “claw back” of the exemption for those who have used it prior to the December 31, 2025 sunset date. For example, an $11.58 million gift made in 2020 which uses the lifetime exemption will not create a tax liability later (such as a death in 2026) should the lifetime exemption be reduced. In essence, the taxpayer may have a “use it or lose it” issue to consider with respect to gift tax planning. This safe harbor was provided in response to the anticipated sunset of the current lifetime exemption at year end 2025. It is hoped that the safe harbor will be applied to any other changes made to the exclusion.


  • Elimination of basis step up with the possibility of gain realization at death. Much of the focus has been on this issue; Biden’s tax platform may treat all transfers of property at death as “realization events,” with the decedent’s estate reporting a capital gains tax on the estate income tax return.


  • Elimination of favorable long-term capital gain tax rates for high income taxpayers. The proposal would remove the 23.8 percent preferential rate for taxpayers with more than $1 million in taxable income, raising the rate to 39.6 percent, inclusive of the Net Investment Income Tax.


  • The loss of valuation adjustments for intra-family transfers. At a minimum, the use of LLCs or FLPs to utilize valuation discounts for transfers to family members (as defined by IRC Sec. 267) would be disregarded. Although the focal point is this particular strategy, there is great concern that bona fide transfers of “special assets,” such as closely held businesses or investment real estate, would also fall under this rule making viable succession planning all the more problematic.


  • Elimination of Grantor Retained Annuity Trusts (“GRATs”). The repeal of this strategy would bring to bear very adverse tax consequence, since GRATs have been protected from adverse gift tax consequences related to IRC Sec. 2702. Without these protections, there would be no possible way to use GRATs under our current low interest rate environment.


  • A fifty-year limitation on Dynasty Trusts. A well-drafted Dynasty Trust can pass value to multiple generations with no transfer taxes. The only limitation is with states that limit trusts under the rule against perpetuities. A fifty-year cap would require the beneficiaries who hold a beneficial interest in a trust to recognize this value upon death. This brings forth issues as to the value of a beneficial interest on this fifty-year anniversary date, particularly when the interest is limited to receiving either income or principal, subject to a Trustee’s discretion (a trust “spray provision”).

    It is important to note that the Obama Administration was looking to put a ninety-year cap on these trusts, while the Biden Administration appears focused on fifty years.


  • Include defective Grantor Trusts in the grantor’s estate. Basically, the defects used to defect a trust for income tax purposes would also make the trust included in the grantor’s estate. IRC Sec. 2036 would be amended to increase the scope of this “dominion and control” so as to have these Intentionally Defective Grantor Trusts (“IDGTs”) reverted to the grantor’s estate. There is also concern that no grandfathering provision would be offered to exclude existing IDGTs from the change of law.


Important Planning Issues to Consider


  • Need to accelerate gift and estate tax planning strategies now. The key is to implement a strategy before a change of administration in the hopes that these strategies are grandfathered under current law.


  • Need to evaluate current plan. As stated above, some strategies may not be grandfathered. All current plans should be evaluated to see whether they are nimble enough to move assets or change trust or other planning documents to meet the changing tax landscape..


  •  Need to meet with Qualified Tax Advisor. The issues discussed above are merely the tip of the iceberg. There are other key corporate, flow through, and individual income tax issues that also need to be addressed. Consult with your tax advisor to ensure that all issue confronting you are addressed in a comprehensive holistic manner.


The summary information in this document is being provided for education purposes only. Recipients may not rely  on this summary other than for the purpose intended, and the contents should not be construed as accounting, tax, investment, or legal advice. We encourage any recipients to contact the authors for any inquiries regarding the contents. FGMK (and its related entities and partners) shall not be responsible for any loss incurred by any person that relies on this publication.


About FGMK


FGMK is a leading professional services firm providing assurance, tax and advisory services to privately held businesses, global public companies, entrepreneurs, high-net-worth individuals and not-for-profit organizations. FGMK is among the largest accounting firms in Chicago and one of the top ranked accounting firms in the United States. For over 50 years, FGMK has recommended strategies that give our clients a competitive edge. Our value proposition is to offer clients a hands-on operating model, with our most senior professionals actively involved in client service delivery.