Updated 10/26/2021
The Biden administration has proposed big tax law changes, with some of the most sweeping changes being made to taxes on assets passed on at death, often called estate taxes. Here’s a summary of the most notable proposals and strategies to consider if they are passed into law.
Proposed Changes
These are some of the major changes on the horizon if this tax plan is implemented:
Reduction in estate tax exemption to $6.05 million. Currently, your first $11.7 million passes tax free, whether you give this away during your life or pass these assets at death.
Valuation discounts for family owned businesses. Current law allows you to discount the value of shares in a family business, family limited partnership, or family limited liability company due to lack of control and marketability when transferred to family members, reducing potential estate tax. The proposed legislation greatly reduces and possibly eliminates these discounts.
Limitation of Irrevocable Grantor Trust Strategies (IGT) starting in 2022. Currently, these trusts enable you, the Grantor, to remove assets from your taxable estate by transferring assets to the trust and paying any trust income taxes. These assets grow and pass estate tax free to your beneficiaries. After January 1, 2022, contributions to these trusts would be affected in the following ways:
- Assets would be included in the gross estate
- Sales between an IGT and the owner would be considered a taxable event.
- Distributions to anyone other than the Grantor would be considered a gift.
- Affected strategies include Grantor Retained Annuity Trusts (GRAT), Spousal Limited Access Trusts (SLAT), Charitable Lead Trusts (CLT), and Irrevocable Life Insurance Trusts (ILIT).
Estate Planning Strategies to Consider
With these proposed estate tax changes on the horizon, certain strategies can still help you reduce your potential estate tax bill.
Use your $11.7 million exemption before it gets cut. Take advantage of the historically high $11.7 million exemption by making large gifts before it is reduced. Consider strategies like funding Irrevocable Trusts, Dynasty Trusts, or Irrevocable Life Insurance Trusts to maximize the tax free growth of your assets for your future generations.
Pre-fund Irrevocable Grantor Trusts. If you’re making annual gifts to a grantor trust to move assets out of your estate over time, consider a larger, lump sum contribution before year end instead. The new law includes contributions in your taxable estate starting in 2022, but grandfathers contributions up to the end of 2021.
Preserve flexibility for the future. Consider trust strategies that move assets out of your estate but preserve some access to the assets through loans or special distribution provisions like Spousal Limited Access Trusts (SLAT) or Special Power of Appointment Trusts. These strategies help you stay flexible for future tax law changes or needs to access funds down the road. For more, read Out of Your Estate, Not Out of Reach.
Preserve insurability. Life insurance often exponentially increases many strategies to pay estate taxes because death benefits pass income tax-free. To prepare for increased estate and capital gain taxation, consider acquiring convertible term insurance today. If these laws pass, you’re able to convert the term coverage to permanent coverage without additional health underwriting, preserving your insurability and flexibility to pay any new estate taxes.
Remember that these proposals are still under negotiation and are not yet law. Estate planning is a balance between keeping control of assets you’ll need and maximizing impact of assets you won’t need on loved ones and causes you care about. While reducing taxes is important, don’t let the tax tail wag the planning dog. That said, if you plan to pass wealth to family or charity, waiting could be costly – the time to plan and implement strategy is now.
Sources – CNR, CNR, Lion Street
Grant Monson
CFP®, CLU®, ChFC®
Partner, Financial Advisor
About the Author
Grant grew up on a working wheat farm in eastern Washington. Today, he credits his family – who still manage the farm – for preparing him to build a business serving others. His vision to lead Alterra is built on relentless dedication to the success of his clients and the team – his extended family.
Grant’s dad says that he hasn’t worked a day in his life because “it isn’t work when you love what you are doing.” When combined with his mom’s view that “helping others should be part of every day”, Grant’s view of financial planning comes into focus. Alterra Advisors is very much a reflection of Monson family values.
Grant earned a bachelor’s degree in business and a master’s in economics at Washington State University. He launched his own financial advising practice over a decade ago, an entrepreneurial quest has become one of the most impactful things in Grant’s life. He loves coordinating the complex financial lives of business owners, bringing a depth of understanding that is rooted in his family’s own experience.
The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.