It’s time to change your estate plan



The evolving portion of the Build Back Better Act (BBB) ​​revenue is dramatically changing the land transfer tax landscape (i.e. gifts and inheritance). Most notable is the acceleration of the planned reduction in unified credit from $ 10 million to $ 5 million (indexed to inflation from 2010). For those of us who like round numbers, the 2022 unified credit is slashed from $ 12 million to $ 6 million more or less. The Special Use Assessment Adjustment for Farms will increase from $ 750,000 to $ 11,700,000 (the 2021 unified credit).

One of the things that is disheartening to learn is that intellectual integrity has limited value in tax practice. Reilly’s first tax planning lawIt’s like that. Do with – Usually refers to taxpayers who get hammered by rules that don’t seem to make much sense. Sometimes it works backwards. BBB’s targeted estate planning techniques at least don’t seem to work, but they do. Which means they are in my bag of tricks and in an audit I would fiercely defend them. On the other hand, I will be happy to see them leave, if BBB passes.

Why did you give me a faulty trust?

Back then we had much higher top marginal rates and a code that you could enforce by fleets of trucks. One way to deal with the high marginal rates was to shift income to lower-income taxpayers, including trusts. One way of looking at the history of the Code is like an arms race between smart planners and legislators and policy makers. A first entry in the race was the idea of ​​the trust held by the grantor.

If you put property in trust, but retain certain powers or could benefit from the trust, then the income of the trust would be included in your return. Over time, other provisions made transferring income to trusts less attractive. The top marginal rate, which had reached 91%, has fallen considerably. And the rate schedule for trusts has been cut. So very little income tax savings could be made by transferring the income to a trust.

There are also retained powers that will result in the withdrawal of a trust in your estate upon your death. The lists are not the same, which has created an opening for shenanigans. Planners began to create trusts that would be effective for estate tax purposes, but not for income tax purposes. They could, for example, give the settlor the power to substitute the property in trust with another property of equal value. It would be the “intentional default” of an intentionally defective transferor trust.

The “advantage” of this arrangement is that the income of the trust is taxed to the settlor even if it benefits the natural objects of its generosity. I have heard stories of clients who were not happy with these arrangements while working in practice and had to find money to pay taxes on income they had not received and to which they did not have access.


What BBB does is make the income tax and inheritance tax rules consistent. If the trust income is shown on your income tax return, then the trust assets will be included in your estate. The rule will apply to trusts created after promulgation and to the part of any trust that is added after promulgation. Thinking about that part, it seems like an accounting nightmare to me, so I think the smart thing to do is not to add to grandfathered trusts.

There are a few other fine points. If distributions are made to beneficiaries other than the settlor, the distributions will be considered as gifts, for example.

It is possible that if this bill is not amended it could be very disruptive for life insurance plans. One of the powers that currently attract the trust for income tax purposes is the right of the trustee to use the income of the trust to pay life insurance premiums. This could affect a large number of existing irrevocable life insurance trusts as many insurance trusts require ongoing funding. I think there will be solutions to the problem, but there may be quite a few people who sleep at the switch and end up having policy proceeds drawn into their estates in the future.

The other technique that is killed is selling to grantor trusts without recognizing any gain. This was another way of exploiting the difference between the income tax rule and the transfer tax rule. The extremely low applicable federal rates made it attractive.

How much is this partnership interest in the window?

There is also an attack on asset discounting. A classic technique is to put a lot of assets into a limited partnership. Then you offer limited partnership interest. Due to the lack of marketability and control and restrictions on transferability, the interests of the limited partnership are worth less than the proportional share of the value of the assets. The new rule would require that non-business assets be taken out of the equation and not be subject to a haircut.

There always seems to be some deference to the real estate masters of the universe in the way the language is framed. Real estate held in a real estate business or business by a person qualified as a real estate professional does not count as a passive asset. Other real estate does. The language on real estate seems unclear to me. I think I’ll wait and see what happens to understand better.


I heard from Neil Carbone by Farrel Fritz PC. He told me that the estate planning community is awaiting final tax changes. The rate change was not a surprise, but the limits on additional contributions to large retirement accounts ($ 10 million and more), which I didn’t mention, were.

He noted the common attitude of haste and expectation that some people adopt towards their estate plans.

After the 2020 election, many high net worth individuals engaged in significant estate planning of one kind or another to use their existing lifetime exemptions. Others have taken a wait-and-see approach. Some wanted to do some planning, but started the process so late that it became impossible to do so by the end of the year because many estate planners, appraisers, and trust companies were so overwhelmed that they just couldn’t accept new work.

Now that they’re upon us, these new tax changes will lead to a similar spillover of estate planning work. If the goal is to use some or all of the increased exemption amounts while they exist, there is still time to do so, as the change in the exemption amounts would not be effective until January 1, 2022 Anyone looking to do it should act quickly, however, as it will become increasingly difficult to find the professionals available to do the job on time.

If you want to do more sophisticated things involving grantor trusts and appraisal discounts, your schedule is even tighter, as these changes could be effective upon enactment. His last word was: “If you are going to act, act quickly“.

Brandon baker from Friedman LLP wrote:

President Biden indicated during his campaign last year that if elected, part of his plan would be to raise taxes for the wealthiest taxpayers, including changing the inheritance tax exemption by under the TCJA. Given the uncertainty of the changes that would be made in 2021 and the possibility that the changes will be retroactive to 01/01/2021, most of our clients have started planning to reduce the inheritance tax exemption in 2020. ; after the election, many of our clients finalized their transfers in December to use their remaining cumulative exemption (and GST exemption) of up to $ 11.58 million available.

Some of those clients who did not act in 2020 made transfers in 2021 either under a formula clause or through a QTIP trust. The use of a formula clause or QTIP trust may allow the donation to be made for an amount that would not exceed the transferor’s available exemption, even if the cumulative exemption changes during the year. . Although the increase in the House Ways and Means Bill (the “Bill”) indicates that the exemption will remain at $ 11.7 million for the remainder of the year, it is not. not yet law. Customers who took action in 2020 are willing to wait and see what happens with the bill over the next few weeks; many of them are on the cusp of “heel giveaways” to take advantage of the exemption available to them left after 2020 and the $ 11.7 million exemption currently available in 2021.

Make sure to follow

Two of Reilly’s Tax Planning Laws are worth highlighting when a new set of estate planning documents are in sight. The fourth – Execution is not everything, but it is a lot – and the Ninth – Tell the preparer what the plan is.

When it comes to execution, I predict there will be people rushing to have documents executed and failing to go through the mundane steps of opening new accounts for new entities and transferring assets. Keep in mind that the new rules will apply to additions to trusts after enactment.

On the ninth law, be sure to provide the new paperwork to whoever does the tax returns, along with some sort of memo from the planners explaining how things are supposed to work. And make sure you understand how they’re supposed to work. Paying the income tax that went to the grandchildren’s trust is a good thing. That was the plan. Don’t complain.

I sometimes think the inheritance and gift tax system is actually a white collar job program for college graduates not smart enough to become doctors or engineers. It redistributes wealth from the upper class to the upper middle class. Too bad it will ruin their vacation.

Other cover

There is too much coverage on this question for me to do my regular exam. I rated this article with several Lowenstein Sandler authors – Housing tax proposal would restrict grantor trust planning: what you need to know now.

The proposed changes are particularly detrimental to those who have created irrevocable life insurance trusts and who continue to fund premiums for policies held in trust through annual donations (including direct payment of policy premiums). If the bill becomes law, such donations will make an increasing portion of the policy proceeds (and any other trust assets) taxable on the death of the settlor – exactly the result that insurance trusts are created. to avoid.

I think this is the most widely applicable problem that can be created. Irrevocable life insurance trusts aren’t limited to the ultra-rich.


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