Alan S. Gasman and Brandon Ketron
The House of Representatives Democrats to high-value and wealthy taxpayers from the ongoing Afghanistan pandemic and evacuation this morning by announcing plans to coordinate how basic income and inheritance taxes work for businesses and families. It provided a less welcome distraction, and promised two certainty in life Benjamin Franklin made it more certain than ever.
No one can provide a comprehensive summary or analysis of what accompanies these 881 pages of the proposed new law, but many major changes, points of confusion, and provided by this proposed law. You can cover the effective date.
Brandon Ketron and I will introduce a free webinar on these new rules on Saturday at 11am EST. Feel free to email us at info @ gassmanpa.com for an invitation to a live presentation and a YouTube replay that will be set up shortly thereafter. Also, send us questions and suggestions about what we want to cover.
Webinar participants include current net worth, annual net savings, asset value growth rates for both individuals and couples, and the inheritance tax savings calculation spreadsheet for the Qualified Personal Residence Trust (“QPRT”) that we recently developed.
Fortunately, there are very few new rules affecting transactions and transfers that take place before the new law is passed, and many provisions will not be effective until January 1, 2022, but the exemption amount. Giving significant value to an irrevocable trust before it is halved must act by the date the law is enacted. Until the date of enactment and the end of the year, based on how the bill was drafted.
Below is a section breakdown of the major changes and effective dates, what changes will be made to the bill, and what to do to see if a substantive bill will be passed this year. Is an idea about what to do. All of this is subject to change as the Senate is involved, but you shouldn’t see anything stricter or unfriendly to taxpayers than what these rules are, and it can be much worse.
At the top of the list of action items for most wealthy American families is to tidy up their homes in preparation for an increasing federal inheritance tax. After months of teasing the prospect of an inheritance tax cut and the possibility of a tax exemption going down before it’s time to give a big gift, the reality of what was proposed now needs to sink for a few days. You may need to take action.
Real estate / gift tax exemption effective January 1, 2022 halved-use or lose
The good news in this area is that inflation-adjusted reductions in inheritance and gift tax exemptions from $ 10,000,000 (currently $ 11,700,000 per person) will remain until the end of 2021, but will be cut in half of the current effective amount. Is to be done. January 1, 2022. This means that the decision to give “use or lose” to wealthy individuals can be made until the end of the year, but the most advised wealthy families will pass such a law. It would be better to give such a gift before. , For gift tax and discount rules described below.
As an example of someone who does not use Granter Trust or discounts, Grandma used a $ 700,000 property tax and gift tax exemption from her previous gift, leaving $ 11,000,000 in tax exemption for the year. If she has $ 21,000,000 real estate and gives a $ 11,000,000 gift, this will reduce her real estate to $ 10,000,000. After that, if Grandma dies after 2022, the tax exemption will not remain. The inheritance tax will be $ 4,000,000 ($ 10,000,000 x 40% = $ 4,000,000). Fortunately, the proposed law does not raise the inheritance tax rate like the Bernie Sanders bill.
If Grandma did not give a gift in 2021 and died in 2022, or if the tax exemption would subsequently be $ 6,000,000 based on half of inflation-adjusted $ 11,700,000 ($ 5,850,000), her property would be $ 21,000,000. It will be reduced. An inheritance tax of $ 6,280,000 ($ 15,700,000 x 40% = $ 6,280,000) ($ 6,000,000 minus $ 700,000 previous gifts) and $ 6,280,000 ($ 15,700,000 x 40% = $ 6,280,000) are obligatory to be paid to Uncle Sam nine months after her death. Checking $ 6,280,000 would be sick.
If Grandma didn’t give a gift, but was on her deathbed on December 31, 2021 and wanted a few more years in a miraculous recovery and a very nice retirement home where she lives. How is it? Do you want her child or best friend to make her health care decisions at that time? A day of life can cost $ 2,280,000.
It is also important to note that there is no “clawback” to use the increased exclusions. This means that if you die when the applicable exclusion is $ 6,000,000, Grandma will not be punished for donating $ 11,000,000 in assets.
Another factor to consider is that the gift must exceed the amount of the tax exemption reduction in order to use the temporarily increased tax exemption. For example, if Grandma donates $ 5,000,000 in 2021 when the exemption is $ 11,700,000 and then dies in 2022, or if the exemption is only $ 6,000,000 thereafter, then Grandma’s exemption is $ It will be 1,000,000. Therefore, in order to take full advantage of the increased tax exemption, Grandma must give all the remaining tax exemption of $ 11,000,000.
The good news is that if the law is passed, families will need to give big gifts until the end of the year. The loss of a very important vehicle that we commonly use for gifts and inheritance tax planning is bad news. If this law is passed, I may have to acquire a hobby other than planning real estate, writing and providing webins. Write a letter to the House of Representatives asking them not to pass the proposed rules on Granter Trust and discounts, which will come into effect on the day President Biden signs the effect of the new law.
What’s the big deal about grantor trusts?
A grantor trust is a trust that can be separated from the grantor and the contributor of the trust for inheritance tax purposes, but is considered to be owned by the grantor for income tax purposes. Transactions between the trust and the grantor are “ignored” because the grantor is considered the owner of the trust for income tax purposes. This means that you can sell or exchange assets for a trust without causing the effects of income tax.
The vast majority of the wealthy people involved in the project have established these trusts, which allows the grantor to pay income tax on the trust assets on behalf of the beneficiaries, and the grantor to sell. Discounts such as LLC’s non-voting interest in long-term low interest rate notes without paying income tax. This figure is a great advantage if the client has a note with an interest rate of 2% and the value does not grow, instead of owning a valuable asset that can generate more than 7% income and growth. .. Not only that, the grantor can continue to pay the income tax associated with the trust’s assets without the income tax payment being considered a gift to the trust. This allows the trust to be exempt from income tax and further reduce the property of the grantor.
In the example above, Grandma could invest $ 14,000,000 in LLC and grant 99% of LLC’s non-voting membership to her descendants, Grantor Trust.