This article was written by Thomas Oriet, Esq, LLM, EA, an Of-Counsel attorney who focuses on asset protection, estate planning, and agricultural law at the Law Offices of Casey D. Conklin.
No estate planning attorney will admit it, but their job became a lot easier with the restructured estate tax with the Tax Cuts and Jobs Act of 2017. With the newly proposed Build America Back Better legislation, the unified tax credit will revert to $5,000,000 from its current exemption amount of $11,700,000. This means decedents who have over $5,000,000 of assets, including gifts made within 3 years of their death, will be subject to the estate tax. The estate tax starts at 18% and quickly reaches 40% per dollar of the gross estate after you reach a $6,000,000 estate. These sound like big numbers, but small business shares, financial accounts, and secondary properties can rapidly exceed the $5,000,000 threshold. Under the $11.7 million dollar credit, very few people are subject to the estate tax.
The $5,000,000 unified tax credit mirrors the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 and the American Taxpayer Relief Act of 2012. The estate tax was repealed in 2010, and these two Acts revived the estate tax with the $5,000,000 unified tax credit. The Biden Administration appears to be “returning to their roots.” Furthermore, the top marginal tax rate of 39.6% of 2013 will return to tax income earned in estates and trusts exceeding $12,500. For estates and trusts earning income above $100,000, another 3% tax will also apply.
Without going into detail, a tax-focused estate plan is a more complex legal document to draft than a simple estate plan. Under the Build America Back Better proposal, more individuals will require a complex estate plan. To make matters worse, grantor trusts may become included in the grantor’s gross estate even if funding the trust is irrevocable. Trust distributions under a grantor trust may also be subject to a gift tax (or a reduction in the unified tax credit to offset said tax). Consequently, the grantor trust may no longer serve as a useful estate planning tool if the proposal is enacted.
Other ideas have been removed from the discussion table. Dynasty trusts are saved from a federal rule against perpetuities. A few months ago, beneficiaries of trusts that last a long time were potentially subject to a tax on the trust assets even though the trust did not distribution those assets. The stepped-up basis at death rule is also saved from amendments, so the tax basis of bequests will continue to rise to their fair market value as of the decedent’s death.
Client Considerations. Clients may still receive the benefits under the current estate planning regime if they hire attorneys before the law changes. Oftentimes, legislatures allow current owners to continue with their legal structures, such as a trust, and the benefits derived from those legal products. Meanwhile, clients who are late to establish their trusts are prohibited by statute or cannot receive the same beneficial treatment. An estate plan may concern an event that is in the distant future, but proactive planning today can safeguard those assets for generations.
Thomas Oriet, Esq, LLM, EA, is an Of-Councel attorney specializing in asset protection, estate planning, and agricultural law at the Law Offices of Casey D. Conklin.
[** The information in this article is not legal advice and must only be used for educational purposes. Please consult with an attorney before making any decision. The author will not be updating the article due to changes in the law.]