| As you may be aware, Congress is working on a reconciliation bill (the “Bill”) which has tax components that could affect your current estate plan. The major changes fall into two categories: (1) grantor trust estate tax inclusion, and (2) estate and gift tax exemption reduction. The Bill could be enacted as early as the end of October, so it is imperative that you review your estate plan to determine if these changes may apply to you. Grantor Trust Rules Many of you have created irrevocable trusts, most of which are “grantor” trusts. Insurance trusts, spousal lifetime access trusts (“SLATs”) and trusts for the benefit of a child or other beneficiary are typically classified as grantor trusts. These trusts are designed to remove assets from the grantor’s estate for estate tax purposes, while retaining the income tax liability which further reduces the assets in the grantor’s estate. Provisions in the Bill would change the exempt nature of grantor trusts and make the assets in the trust includible in the grantor’s estate for estate tax purposes. However, all grantor trusts currently in existence or created before the enactment of the Bill will be grandfathered by the Bill, so assets already in a grantor trust will continue to be kept out of the grantor’s taxable estate. Unfortunately, any assets added to a grantor trust once the Bill is enacted will cause a part, or all, of that trust to be pulled back into the grantor’s taxable estate. Therefore, if you have an irrevocable grantor trust in existence before the date of the Bill’s enactment, you cannot add assets to the trust after the enactment of the Bill without causing estate tax inclusion. This potential change is of particular concern if you have an insurance trust because any premiums paid on insurance policies in the trust are considered assets added to the trust. Therefore, if the Bill is enacted, premiums paid after the date of enactment could cause the proceeds of the insurance policy to be included in the grantor’s estate upon his or her death. To avoid this outcome, the grantor has a couple of options: (1) fund the trust with enough cash or other assets to pay the future premiums on the policy; or (2) convert the policy to a self-funded or self-borrowing policy (if permitted by the insurance company). For all other types of grantor trusts, you should consider making gifts to such trusts before the enactment of the Bill to take advantage of the current lifetime estate and gift exemption amount, as the Bill proposes to change it as explained below. Estate and Gift Tax Exemption Currently, an individual can have an estate of up to $11.7 million without incurring any federal gift or estate tax ($23.4 million for married couples). The Bill includes a provision that will reduce this lifetime exemption amount to approximately $6 million (after adjustment for inflation) beginning in 2022. Therefore, you should consider taking advantage of the current exemption amount of $11.7 million by making gifts up to that amount so you can remove an extra $5,700,000 from your taxable estate (not to mention all the subsequent appreciation thereon and income therefrom). Gifts can be made to a grantor trust before the enactment of the Bill, or to non-grantor trusts or outright prior to the end of 2021 to take advantage of the current estate tax provisions. If you are not considering transferring such a large amount, gifts of $6 million or less can still reap great rewards. If you make the gift to a grantor trust before the enactment of the Bill, you would still have a trust that allows you to enjoy the current grantor trust rules, which continue to whittle down your taxable estate by having you, as grantor, be responsible to pay the income taxes on the trust’s earnings, allowing the trust to grow tax-free at a more exponential rate. This benefit would not be available if you do not form the trust until after the Bill is enacted. Keep in mind that there is a small risk that Congress could make the change retroactive for gifts made in 2021, which would make any gifts in excess of the proposed $6 million exemption amount subject to the gift tax. However, the most recent version of the Bill in the house indicates that the change will be applied to gifts made in 2022. However, regardless of whether the Bill passes, whether in a similar form to its current proposal or with significant alterations, action now would still be beneficial. The estate tax exemption is already scheduled to decrease at the start of 2026 under current law, and even if the Bill does not pass, may be reduced sooner by Congress. Additionally, the grantor trust provisions have been on the radar for some time as well, though this is one of the first significant bills amending those provisions. As a result, if you act now, even if the Bill does not pass, you will already be prepared for any potential future changes, as well as the already scheduled exemption reduction in 2026. Thus, regardless of what occurs with the Bill, you will have locked in the benefits of the current law, which will eliminate the need to scramble to address any changes that may occur in the future. |
Neighbor Has A Trust; Should I Get One Too?
Bridget T. Eichinger
February 20, 2024
The title of this blog article may seem absurd, and yet I cannot tell you how many clients have told me that someone they know
