In the attempt to progress towards a modern US tax system, the Biden administration has proposed a number of changes to the current tax code. According to a publication released by the U.S. Treasury early this year, they hope to push these changes through Congress which is necessary to gain approval for the amendments. It’s true that many Americans are divided on the best methods for stimulating the US economy, however, one fact remains undoubtable - careful estate and tax planning is crucial for the wealth and financial security of American families. 

The Greenbook, a publication that provides information regarding the Administration’s revenue proposals, details the proposed changes which will ultimately impact estate planning in numerous ways. Many of the effective estate planning strategies that have been diligently defined by professionals in the industry for decades may be discarded. However, this could also enhance certain processes in estate planning by implementing other key strategies.   

How Might the Estate Tax Exemption Reduction Affect You?

Notably, the reduction of estate and gift tax exemption amounts is absent from the list of proposals. While it’s possible that this could change in the future, we know that for now, these tax exemptions remain extremely high. It’s important to understand the law as it is written today so that you can make appropriate decisions with your assets and prepare for other coming changes. 

As it stands today, the estate tax laws that were passed under the Trump administration will expire and reset to the prior laws starting in 2026. If there is no action made by Congress to change this, the reset will restore the estate and gift tax exemption amount to $5 million, as it was in 2016. However, the rate of inflation must also be included in this amount which brings the total to roughly $6.6 million by 2026. 

With this information in mind, it’s crucial that you do all you can now to determine the expected return on your investments for the future. To do this, you should consider the average rates of return on your current investments, compounded annually. Many people have found that a healthy return of 7% annually could double one’s net worth in just 10 to 12 years. However, if estate tax exemption amounts are reduced by roughly 50% and continue to increase with the inflation rate, you risk having to pay significantly high estate tax rates. 

Other Greenbook Proposals May Be a Factor

It can be difficult to prepare for the uncertainties that may affect your tax and estate planning strategies. Without knowing what the future holds, how do you determine the best way to protect your assets? To make a more accurate decision, some of the other Greenbook proposals should also be considered, such as: 

These changes haven’t been approved yet by Congress, but their consideration could help sway your strategic plans. The following strategies are still effective tools under current tax law, and implementing them now could provide significant tax savings.

Grantor Retained Annuity Trust

A grantor retained annuity trust (GRAT) is an estate planning strategy that allows the grantor to contribute appreciating assets to chosen beneficiaries using little or none of your gift tax exemption. To do this, you would transfer some of your property or accounts to the GRAT in which you will still retain the right to receive an annuity. Following a specified period of time, the beneficiaries will receive the amount remaining in the trust.

inheritance estate planning

Installment Sales to an Intentionally Defective Grantor Trust

Another estate planning strategy that may be beneficial for you is to gift seed capital, typically in the form of cash, to an intentionally defective grantor trust (IDGT). You will then sell appreciating or income-producing property to the IDGT in which they will make installment payments back to you over a period of time. If the account or property increases in value over the period of the sale, the accounts or property in the trust will appreciate outside your taxable estate and will therefore avoid estate taxes. Additionally, the trust does not have to pay income taxes on the income the trust retains since the taxes are already paid on the income generated and accumulated in the trust.

Spousal Lifetime Access Trust

In a spousal lifetime access trust (SLAT), the grantor is to gift property to a trust created for the benefit of their spouse and possibly their beneficiaries. An independent trustee can make discretionary distributions to those beneficiaries, which can also benefit you indirectly. Contrary, an interested trustee should be limited to ascertainable standards when making distributions, such as health and education. With this estate planning strategy, you can take advantage of the high lifetime gift tax exemption amount by making gifts to your spouse. This trust avoids the use of the marital deduction which means the assets in the SLAT will not be included in either your or your spouse’s gross estate for estate tax purposes.

Irrevocable Life Insurance Trust

Finally, there are irrevocable life insurance trusts (ILITs). This trust allows leveraging life insurance to ease the burden placed on your estate if it becomes subject to estate tax at your death. This type of trust is established by transferring an existing life insurance policy into the ILIT in which you make annual gifts to the trust in order to pay the premiums on the policy. At your death, the trust receives the insurance death benefit and distributes it according to the trust’s terms. The death benefit and the premiums gifted to the trust are completed gifts, meaning your estate would not include any of the trust’s value. 

Meet with Reputable Estate Planning Attorneys Today

We are holding a series of webinars over the coming weeks, from which you can obtain a great deal of useful information. Just choose the session that fits into your schedule. The webinars are being offered on a complimentary basis, so you have everything to gain and nothing to lose. This being stated, we do ask that you register in advance so that we can reserve your seat.

To sign up for an estate planning webinar, visit Anderson, Dorn & Rader here. Once you find a date that is right for you, click on the button that you see and follow the simple instructions to register. For more information regarding estate tax exemptions and planning, connect with our estate planning attorneys today.

SPEAK WITH AN ESTATE PLANNING ATTORNEY

The Value of An Irrevocable Trust from Anderson, Dorn & Rader, Ltd.
There are two types of irrevocable trusts: irrevocable living trusts and testamentary trusts. They both serve different purposes. An irrevocable living trust,  also referred to as an  “inter vivos irrevocable trust,”  is created and funded by
someone who is still living. However, a testamentary trust  is created and funded after someone’s death.  This means
that no one who is still living  has any legal authority to change the terms of the trust.  Learn more about irrevocable trust in this presentation.

 

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