Estate planning for the Biden era

Gabrielle Saulsbery, BridgeTower Media Newswires

Joe Biden proposed some fairly substantial changes in the estate tax landscape while on the campaign trail based on “[raising estate taxes] back to the historical norm.” The top gift and estate tax rates – currently 40% -- ranged from 45% to 55% in the period of from 1984 to 2009 and the tax exemption for that stretch, currently at $11.58 million, ranged from $600,000 to $3.5 million. Biden indicated that the exemption would be reduced to $3.5 million and the estate tax rate would be increased to 45%.

Mazars USA Partner Michael Rofman noted that while the tendency in recent years has been to reduce the estate tax rate—it was 55% from 1984 to 2002, creeping down to 45% by 2009, to 40% during the Trump administration. The proposed changes require action from those who want their family to get the most out of their wealth, Rofman explained.

“Any type of regulatory change creates additional work. An estate plan is not done once and never looked at until death, you have to revisit it, especially with each change in administration. Things might get more preferable to do additional planning of their additional assets, or the need to drastically make changes because of certain reductions,” Rofman said.

The need for estate planning for individuals with less than $11.58 million in assets is fairly low, but if the exemptions falls to just $3.5 million, those with estates in the range between those two numbers will need to react.

“You have a Democrat coming in for four years, it could be eight years. If another Democrat comes in behind him, it could be 12 years. You’re planning for the next eight to 12 years. The older you are, the more certain the end of life comes, and you try to mitigate by planning around the certain tax strategies that are available to you in this landscape,” Rofman said. “Now’s the time to do something, because once it happens, if it happens, it’s going to be a lot more costly in terms of the estate tax. You’ll lose out on $7 million of exemptions, and subject to even a 40% tax, that’s $2.8 million. And that’s the minimum. If rate increases to 45%, its $3.1 million of less value transferring to the heirs of the estate. It’s huge.”

Some high-net-worth individuals are “a little on hold” until Biden unveils legislation, cautious based on the possibility that the lax law will change retroactively to Jan. 1, 2021, noted Market Leader of Withum’s Private Client Services Group Hal Terr, who is based in Princeton.

There was a rush on estate planning through Dec. 31, spurred by concerns over potential estate tax changes with a change in administration. Though retroactive changes aren’t the standard, some “constitutional cases would allow a retroactive change,” he said, and while “people still have to plan their estates, they may be cautious making large gifts given the uncertainty.”

As the pandemic has pushed off so much, so too is the likelihood it will push off the enactment of new rules.

“Biden’s first order of business is protecting the nation with the pandemic. Listening to his inauguration speech yesterday, he wants to mend many of the global policies and restore them the way they were, hopefully better than they were before. I think those are the first two priorities. It’s very likely by the end of the year, when income taxes become a much hotter topic, is likely when we’ll see the actual change,” Rofman predicted.

Terr said while tax law changes are historically done in the spring and early summer, Biden has bigger fish to fry right now.

“We need to know where the virus stands, what’s the economy doing, are we going to be in a recession. Those will all be factors before an administration would propose tax increases,” Terr said.

Whatever changes he does make, the recent runoff elections in Georgia that gave Democrats control of the Senate allow Biden to push the changes through via the Budget Reconciliation Act, the same law that allowed Trump to push his tax law through in 2017.

Additionally, Biden has proposed eliminating the stepped-up basis rule that allows people to pass capital gains onto their children after death without taxation.

“Do [these changes] make our job harder? Yes, because we’re the bearer of the news explaining this to our clients, that as a result of changes in tax policy, the impact is significant. But at the same time, someone’s got to cover all the [Paycheck Protection Program],” Rofman said.

In Mazars’ blog Estate Planning in Light of the Upcoming Presidential Election and Current Economic Environment, authors Richard Bloom, Bruce Richman and Melissa Gonzalez suggested several planning ideas that could help folks save a little money on the taxes they need to pay.

On one hand, the authors recommend gifting specific assets to an heir or to the trust of the heir to fully use the lifetime exemption before it’s reduced. “This may be especially attractive if the gift is of a closely held business or real estate with an artificially depressed valuation, given the current economic climate or locale of the real estate,” the blog post suggested.

Intra-family loans can also be made, lent from an older family member to a younger family member at low interest—0.14% for a short-term loan and 0.38% for a mid-term loan—and the recipient can invest loan proceeds into an asset that will grow over time. Given the depreciated value of many assets amid the COVID-19 economy, the blog notes that appreciation above the interest rate charged passes to the younger family member gift, estate and generation-skipping tax free; and the value of the assets remaining in the senior family member’s estate will be frozen at the loan amount plus the low amount of interest received.

“An intrafamily loan, as long as it’s structured properly, is not a gift. I could make a loan to a child, and as long as there’s a loan document and it charges the applicable federal rate, which for February 2021 for a loan term greater than 9 years is 1.46%, I could loan my child $1 million and they could pay me [that interest]. Say they invest it and earn 5%, the difference is removed from my estate,” Terr explained. “It’s way to help our family members.”

The sale of assets to an Intentionally Defective Grantor Trust features similar benefits to those of intrafamily loans. When the grantor sells assets to a trust in exchange for a promissory note payable to them for a number of years, the appreciation of those assets sold will likely be greater than the interest rate charged. The grantor can continue paying the income taxes of the trust without that being considered a gift, thus chipping away at the assets’ taxes and allowing them to grow tax-free. Upon full payment of the promissory note, the assets remaining in the trust will pass to the beneficiaries free of any additional gift, estate and generation-skipping transfer taxes.

With Grantor Retained Annuity Trusts, individuals transfer specific assets into a trust while also retaining the right to receive an annuity payment on those assets for some time, after which the remaining assets in the trust pass on to its beneficiaries. The same goes for Charitable Lead Annuity Trusts, though in CLATs, the grantor designates a charity to receive that annuity stream for that time before the remaining assets are passed onto the beneficiaries.

“These allow you to freeze values in the estate and you get the appreciation out of your estate. I could put $1 million in a GRAT, I take back an annuity based on the IRS interest rate which is 0.6%; as long as I beat that rate, that appreciation is removed from my estate and I create private annuity,” Terr said. “If the trust earns 5%, the appreciation above the rate is removed from my estate tax-free.”

Some grantors may want to consider swapping their assets with a grantor trust, Bloom’s blog post suggests. “A grantor can put the grantor trust swap power to use and swap assets that have a currently depressed value, but are expected to rebound, for assets inside the trust that are more stable. This allows the appreciation of the asset during recovery to occur inside the trust and outside of the taxable estate. In addition, assets inside the trust that are depressed in value, and not expected to recover, can be transferred back to the grantor in exchange for cash or other assets that are expected to appreciate,” Bloom wrote.

Finally, a Spousal Lifetime Access Trust is an irrevocable trust in which the grantor’s spouse is a potential beneficiary. Gifting to the SLAT while asset values are depressed removes the assets and their future appreciation from the taxable estate; and SLAT assets can be distributable to the grantor’s spouse when needed.

But this one might raise some issues. “A lot of clients were pushing the SLAT where one spouse creates a trust for their spouse and decedents, but the other spouse has access to the income or principal. You have to worry about two things. One, you have to be nice to your spouse. If they divorce you, you lose access to the funds. If they pre-decease you, you lose access to the funds,” Terr said.

If the spouse pre-deceases the grantor, the beneficiaries become the children and grandchildren. The grantor can access the funds through borrowing, but not without paying interest and principal.
With so many options, Terr notes there’s no best one.

“Estate planning is client specific, specific to a client’s goals and objectives. They should reach out to qualified professionals so that plans are addressed to meet specific estate planning needs,” he said.