CEO MUSINGS: NEAR MISS, BUT THE HITS KEEP COMING
by Mike Hoffman, Esq., CPA
A year ago, we were worried about the federal gift and estate tax exemption being reduced, the federal gift and estate tax rate increasing, the loss of stepped-up basis at death, capital gains at death, the elimination of valuation discounts, the inclusion of grantor trusts in taxable estates, and many other significant tax changes that were being proposed by the Biden Administration and the Democrat controlled Congress. While it seems less and less likely that President Biden has any political capital and the Democrat controlled Congress has any appetite for significant tax increases, the battle is still waging.
Most significantly, the federal gift and estate tax exemption is scheduled to be cut in half, by statute, at the end of 2025, which is only three years away.
The IRS’ disdain for valuation discounts and the use of grantor trusts to significantly reduce estate tax exposure is consistent, and the IRS has learned to flex its power and influence much more effectively over the last several years.
A 2022 checklist for estate planning should include the following:
- Review and update your core estate planning documents. These include your Last Will and Testament, your General Power of Attorney, and your Healthcare Directive. Tax law and Georgia law has changed significantly, so these documents need to be updated to 2022 standards.
- Create your dynasty family trusts before Congress has a chance to limit the effective duration of these trusts for federal estate tax purposes. Hopefully, trusts that are in place will be grandfathered from a lot of changes that have been suggested by various Democratic Congressman.
- Make substantial gifts to these dynasty family trusts while the federal estate tax exemption is over $12 million (scheduled to be cut in half at the end of 2025).
- Consider substantial sales of appreciating assets to grantor family trusts to “freeze” the value of these family business and real estate assets for federal estate tax purposes.
- Take advantage of aggressive valuation discounts, particularly when valuing hard-to-value assets, such as family businesses or real estate, before such discounts are legislated away.
- At a minimum, make use of annual gift tax exclusions (currently $16,000 per donee per year).
- Post SECURE Act, plan for retirement assets to be taxed within ten years of death, and explore the desirability of creating see-through trusts for beneficiaries. The purposes of such a trust beneficiary may be to control the custody and management of retirement plan assets, protect these assets from creditor claims, and control the further disposition of these significant assets within the family. Typically, post SECURE Act, these see-through trusts would take the form of a Conduit trust for surviving spouses and Accumulation trusts for other qualified designated beneficiaries.
- Make sure that all gift tax returns have been adequately prepared and filed, as substantial disclosure allows the statute of limitations to run on estate planning transactions implemented during life.
- Finally, for those who have done and will continue to do significant estate planning, invest the time and energy to review those steps that have already been taken, applying any remedial work or documentation that would be necessary to avoid IRS scrutiny.
Remember, the federal estate tax is a “voluntary tax”. With appropriate planning, it can be eliminated. The estate tax, income tax, asset protection, probate savings and other advantages of estate planning can run for many, many generations. It typically starts with you embracing the necessity, urgency and significance of developing the appropriate plan.
