CEO Musings: Fall 2023 Status, Wealth Transfer Taxes

By Mike Hoffman, Esquire, CPA

Back in the summer of 2011, I wrote an article, “The Status of Wealth Transfer Taxes.” The $5M estate gift tax exclusion level had just been adopted. The estate tax, gift tax and generation skipping tax were unified at 35%. Portability had just been adopted.

I wrote, “We have remained under a cloud of uncertain legislation and rules. The estate planning environment has been supported by four strong legs of the stool. We have witnessed the longest, strongest, deepest recession in our lifetime, and valuations will never be lower. We are experiencing a historically low interest rate environment, which enhances most of the estate planning techniques that we are able to implement. We are in an environment where the budget crisis begs for increased revenue and, therefore, increasing taxes in the future, coupled with a tax the rich mentality.”

The more things change, the more they stay the same. The exemption levels have grown to almost $13M (although, scheduled to be halved at the end of 2025), and the unified death tax rate has gone to 40%. We are still living through trillion-dollar deficits and our government has no success at reigning in spending. Now, however inflation and higher interest rates make additional tax revenue more urgent.

In 2011 and 2012 I wrote about valuation discounts being under attack by President Obama and Congressional Democrats. I wrote of revenue-raising proposals being reviewed by Congress, including eliminating the benefits of grantor trusts, limiting the duration of GST exempt trusts, imposing a minimum ten-year term for GRATS, and reducing the availability of entity-based valuation discounts.

In May of 2021, I wrote, “proposals attack the basic tool of grantor trusts,” and suggested that assets held in grantor trusts would become taxable at grantor’s death and includable in grantor’s taxable estate. Proposals to eliminate minority interest discounts and lack-of-control discounts would have a huge effect on the valuation process that is employed for gifting purposes…and the IRS wants to limit the ability to take any sort of discounts on non-business assets (e.g., securities). I went on to say that use of grantor trusts might be severely limited; for those trusts that are not grandfathered, trusts might no longer exist for longer than 50 years for estate planning purposes.

Last year, in developing my “2022 Checklist for Estate Planning,” again, I cited the IRS’ disdain for valuation discounts and the use of grantor trusts to significantly reduce estate tax exposure. The IRS has consistently been attacking the same things and it learned to flex its power and influence much more effectively over the last several years.

Now, the Biden Administration has published its Green Book for 2024. The Green Book contains  an annual list of legislative and revenue priorities entitled the “General explanations of the administration’s fiscal year 2024 revenue proposals analysis and discussion.” As always, the Green Book contains many proposals that significantly affect estate planning opportunities that we currently employ, and, if changed, would be very detrimental to certain clients. The items in the Green Book often reflect the “chips” that the Administration is willing to use at debt ceiling and fiscal negotiations.

For years, certain clients have been reluctant to heed the warnings about possible legislation changes. Here is a list of pertinent categories which should require pro-active planning:

1. Family dynasty trusts should be established and funded in order to be grandfathered from any changes to the “gain recognition rules”, estate inclusion or limits to the term of trusts, in the future;
2. Asset protection planning;
3. Gifts to pay insurance premiums;
4. GRATS;
5. Lower lifetime exemption amounts;
6. Elimination of valuation adjustment mechanisms, such as formula gifting;
7. Gifting valuation discounts on non-publicly traded property for the benefit of a family member.

Succession planning for closely-held business owners should consider the merits of planning before any changes occur.

Déjà vu, (since we have been discussing these themes for over a decade), or might this be the time when some of these proposals gain traction and take effect? Why wait? Procrastination could be devastating!