With a lot tax laws making its manner by Congress, it could be time to begin eager about the best way to assist your shoppers play protection in opposition to potential tax hikes. The property planning methods mentioned beneath might assist rich shoppers mitigate the affect of the tax proposals at present gaining traction on Capitol Hill.
After all, as with every property planning resolution, it’s essential to your shoppers to seek the advice of with a certified legal professional earlier than taking motion. That mentioned, this info might provide help to educate your shoppers, together with high-net-worth (HNW) shoppers, concerning the potential affect of tax modifications on their property plans.
How May Tax Adjustments 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 be capable to use this massive exemption in 2021. As of this writing, the reply is more likely to be sure. A right away discount is not a part of two payments at present into account by Congress: the American Jobs Plan and the American Families Plan.
One other invoice, the For the 99.5 Percent Act, does embrace present and property tax modifications, nevertheless it doesn’t try and 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 will not be penalized if they die when the exemption is lower.
4 Property Planning Methods to Mitigate Tax Hikes
As a result of the payments talked about above are making their manner by Congress, their particulars aren’t set in stone. But when your shoppers are all in favour of 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 “intentionally defective grantor trusts,” these trusts provide an easy manner to make use of the lifetime property tax exemption and preserve property within the household. An irrevocable belief will be set as much as profit youngsters whereas permitting the belief to be taxed to the grantor for earnings tax functions. This offers 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 present to beneficiaries.
Notably, the 99.5 P.c Act and the Sensible Taxation and Equity 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 want to add this element to their property plan, they could want to think about creating and nominally funding such a belief as quickly as potential. Extra funding may very well be organized later when the ultimate laws turns into clearer, or property funded into the belief may very well be exchanged later for different property.
2) SLATs and ILITs. Spousal lifetime entry trusts (SLATs) and irrevocable life insurance coverage trusts (ILITs) concentrate on combining wealth switch techniques with leveraging and defending property values. Sometimes, each sorts of trusts personal giant life insurance coverage insurance policies and periodically obtain presents from the grantor to cowl their equally giant premium funds. These contributions will be structured as bigger presents that expend 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 earnings tax–free dying advantages as a result of the profit is paid exterior 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 affect of congressional payments on these trusts may very well be dramatic. For one factor, SLATs and ILITs are sometimes grantor trusts, that means the problems mentioned above would apply. Though the trusts is perhaps 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 which may be price your shoppers’ consideration is to prefund these trusts to permit the trustee to pay up the coverage, a method that will use the property tax exemption this 12 months whereas the brink is excessive. It could additionally seem more likely 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 techniques. They let grantors take away future progress from their property whereas nonetheless probably receiving ongoing advantages from the property. Each GRATs and FLPs will be designed to make use of little or no property switch tax exemption.
The 99.5 P.c Act explicitly targets GRATs, mandating that they should be greater than 10 years in length and go away a minimum of 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 is perhaps the ultimate 12 months to maneuver important money or extremely considerable securities out of a grantor’s property.
Likewise, the 99.5 P.c Act introduces limitations to low cost valuation guidelines—most notably concentrating on entities reminiscent of FLPs and LLCs by stopping a reduction in instances the place any member of the family continues to manage the transferred entity. It could get rid of the long-standing apply of methodically transferring FLP pursuits to the following 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 12 months—could also be one thing they need to think about and talk about with their legal professional or tax skilled. It’s price noting, nevertheless, that the 99.5 P.c 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 may think about creating contingent presents and trusts by 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 concurrently a private earnings tax return, this method 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 resolution 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 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 might wait till 2022 to make this resolution.
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 useful schooling by initiating a dialogue on this matter. And, in fact, it’s 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.