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Planning Matters | The HEALTHCARE Issue 2021

Planning Matters | The HEALTHCARE Issue 2021

Strategies for a Possible Reduced Estate Tax Exemption

by Mary E. Vandenack And Michael J. Weaver

Trying to figure out what is going to happen with the federal estate tax exemption is like trying to avoid getting soaked while being without cover during a thunderstorm. The increase in 2017 to $10 million per individual ($20 million for a couple), indexed for inflation, made the estate tax a non-issue for many, at least through 2026. Given the high costs of the pandemic and a change in the dynamics of government, there is concern that the current exemption will be reduced prior to 2026. During 2020, estate planners implemented numerous strategies seeking to preserve the higher exemption without giving away the farm.

While a retroactive change is not typical, many commentators are concerned that 2021 might be the year where a retroactive change reducing the federal estate tax exemption (as well as other tax changes) could occur.

Common approaches to using a federal estate tax exemption include outright gifting (very few people want to give away $20 million even if they have it to give away), irrevocable trusts with spousal access, gifting of interests in family entities where the founder continues to act as manager, or some combination. For example, Mick and Meri might create a family limited liability company and contribute land in the path of development to the company. Mick and Meri might own voting units and act as managers for the LLC. Mick and Meri then each create an irrevocable grantor trust (with differing provisions to avoid the reciprocal trust doctrine) and contribute non-voting interests in the LLC to their trusts. Assume that land valued at $30 million was contributed to the LLC. When the LLC interests (rather than land) are contributed to the trusts, valuation discounts can be taken because the interests are not easily transferrable and may not have voting rights. This approach achieves a leveraged gift. In designing the trusts, Mick and Meri each provide the other access to the trust during lifetime (lifetime access can be provided in differing ways).

Strategies using estate tax exemptions can be utilized in 2021; however, those that are concerned with the possibility of a retroactive change should consider strategies that won’t result in a taxable gift if there is a retroactive change. For example, a gift could be made to marital type trust so that a QTIP (qualified terminable interest property) election could be made with respect to the trust in spring of 2022. Another approach is to make a gift to a trust using a formula that limits the taxable gift to the amount that ultimately applies to it. Another option is to make a gift to a “family trust” that provides that the spouse is the primary beneficiary. The trust would then provide that if the spouse disclaims the spouse’s interest, the disclaimed portion reverts to the donor of the trust.

The reality is that as of the date I am writing this, we don’t know what tax law changes will come through Congress; however, given the continuing impact of the pandemic on lives and likely impact on taxes, estate planning, in advance, should be a priority.

Planning Matters | with VW Law