2021 Estate and Tax Planning Strategies
to Consider (Before It’s Too Late!)
Good riddance to 2020, the difficult and unprecedented year that just passed. Hello to 2021 and the promise of better times ahead!
The COVID-19 vaccine is being rolled out. A new President is in office and the makeup of the new Congress may bring a greater chance of change to the estate and gift tax laws. What does that mean for your estate plan?
For those of you who did not put gift and estate tax planning changes in place by December 31, 2020, there is still reason to act sooner rather than later. For the time being, the gift and estate tax exemption in 2021 is $11.7 million per person (or $23.4 million for a married couple). However, President Biden has expressed his intention to reduce the exemption and analysts estimate that the new exemption will be somewhere between $3.5 million and $5 million per person. Other possible changes include a cap on lifetime gifts (perhaps $1 million) and restrictions on Grantor Retained Annuity Trusts (GRATs).
Although it is possible that any newly enacted estate and gift tax legislation could be retroactively applied to be effective January 1, 2021, there is at least an equal chance that it would only be effective as of the date of enactment, the date that President Biden took office (January 20, 2021), or as of January 1, 2022 (even if enacted in 2021). Accordingly, it appears that there still may be time to take advantage of the historically high estate and gift tax exemption and the historically low interest rates by implementing gift and estate tax planning that would act as a hedge against likely future changes less favorable to taxpayers. Among the available planning strategies, consider the following:
1. Outright Gifts to Children and/or Grandchildren. This option, while straightforward and cost effective, leaves the donor with little flexibility in the event that the donor should ever need any of the gifted funds in the future and puts assets in the hands of people who may not yet be able to manage them. There are also creditor and marital protection issues for the person receiving the outright gift that this approach does not address.
2. Gifts to Children and Grandchildren in Irrevocable Trusts. The Grantor would create a trust for the benefit of one or more of his or her descendants and fund it with assets up to the current exclusion amount. In addition to removing the gifted assets from the Grantor’s estate, the value of the assets grow in the trust instead of in the Grantor’s estate, resulting in additional estate tax savings for the Grantor. Moreover, the trust can be structured as a “grantor trust” for income tax purposes. This means that the Grantor pays the income taxes on trust income leaving more assets for the trust beneficiaries and allowing the Grantor to transfer more assets out of his or her estate without adverse tax consequences.
3. Grantor Retained Income Trust (GRAT). A GRAT is created by a Grantor transferring one or more income-producing assets (such as a stock portfolio) to an irrevocable trust. The Grantor retains an annuity interest (either a fixed amount or a percentage of the initial value of the trust) for a term of years. At the end of the term, the balance in the GRAT passes to the remainder beneficiaries. Using a GRAT allows the Grantor to retain a steady stream of income while transferring assets out of his or her estate that will, presumably, gain value over the term of years. GRATS are especially attractive when the interest rates are low. Unlike a gift, under current law it is even possible to “zero out” a GRAT so as not to constitute a gift at all for gift tax purposes. This strategy is essentially a “freeze,” as the value of the Grantor’s initial transfer (plus an additional amount equal to the IRS Section 7520 rate) will be returned to the Grantor while the appreciation will pass out of the Grantor’s estate to the remaindermen free of estate tax or any additional gift tax.
4. Spousal Lifetime Access Trust (SLAT). The Grantor spouse creates an irrevocable trust for the benefit of the beneficiary spouse (and possibly children or grandchildren) during the beneficiary spouse’s lifetime. As with the aforementioned gift to an irrevocable trust, the gifted assets are removed from the Grantor’s estate and the value of the assets can grow in the trust instead of in the Grantor’s estate, resulting in additional estate tax savings for the Grantor. However, unlike other irrevocable trusts, making the Grantor’s spouse a beneficiary of the trust creates an indirect benefit to the Grantor since a benefit to their household would also benefit the Grantor spouse. Couples can run into problems, however, if the marriage dissolves or if the beneficiary spouse dies before the Grantor spouse. In either case the Grantor spouse could lose the benefit of indirect access to the Trust funds, depending on how the SLAT is structured.
These are some of the many ways in which individuals are able to still benefit from the current very high $11.7 million dollar federal estate and gift tax exemption before it is likely reduced significantly.
Please contact us if you would like to discuss how one of the above strategies could be beneficial to you, or any other aspect of your estate planning.