How Could The Proposed American Housing and Economic Mobility Act of 2024 Affect Estate Planning

Are You Prepared for the Potential End of the Escalated $13.6 Million Estate and Gift Tax Exemption? And, what might a Kamala Harris presidency do to the estate and gift tax area?

With the 2024 presidential election looming, and the outcome of the race a virtual toss up, high wealth individuals have begun asking questions regarding how best to protect their estates in light of the scheduled “sunset” of the very generous estate tax provision that was enacted as part of Donald Trump’s 2017 Tax Cuts and Jobs Act.

Under current law, individuals can transfer up to $13.61 million to family members or beneficiaries without owing gift or estate taxes, with this exemption doubling to $27.22 million for couples.

If this current provision expires as scheduled, at the end of 2025, the estate and gift tax exemption will essentially be cut in half. Individuals will be subject to the 40% transfer tax on any gifts over approximately $6-$7 million and couples will be taxed on any gifts over $12 – $14 million.

Former President Trump has stated his intention to extend the 2017 tax cuts while Vice President Harris has advocated for higher taxes for those making more than $400,000.

Under the guise of creating more affordable housing, Congress has proposed The American Housing and Economic Mobility Act of 2024, raising revenue by instigating major estate tax reform.

Along with the cutting the estate and gift tax exemption, other sections of the above bill could affect how estate planners use trusts and other estate planning tools to protect generational wealth:

• The estate tax exclusion would be reduced to $3,500,000 and the estate tax rate would increase. The proposed estate tax rates would increase progressively, with a 55% tax on estates valued up to $13 million, a 60% tax on amounts over $13 million up to $93 million, and a 65% tax on amounts over $93 million. The bill also adds a further surtax to estates over $1 billion.

• The bill would require that grantor retained annuity trusts have at least a 10-year life and a remainder interest equal to or greater than 10% of the value of the assets transferred to the trust. This provision would be effective after the date the bill is enacted and could end the use of these grantor retained annuity trusts as an estate planning tool.

• One of the provisions would add a new section to the Internal Revenue Code, changing the dynamics of grantor trust rules. This would affect how grantors can interact with their grantor trusts, and what is and is not considered a gift. In addition, property held in grantor trusts would no longer be allowed a step-up in basis. This provision would apply to trusts created on or after the date of enactment, and to trusts established before the date of enactment but funded by gift or sale after the enactment. It does appear that trusts established and funded prior to the enactment date would retain their current advantages.

• Another section of the bill would impose the generation-skipping transfer tax (GSTT) on certain transfers to beneficiaries who are three generations below the trust transferor. That is, a person could create a trust for grandchildren and living great grandchildren who would not be assessed the GSTT, but the GSTT would be imposed on gifts to future great-grandchildren.

• The gift tax annual exclusion would be reduced from $18,000 to $10,000 per person with a potential limit of $20,000 in exclusion gifts annually per donor.

• New sections of the IRS code would limit discounts on certain transfers of assets:
  • Discount limited by reason of family control;
  • The marketability discount would be limited on the transfer of certain non-business assets;
  • Passive assets would be treated as non-business assets.

• A surcharge would be imposed on high income earned by estates and trusts. The charge would be equal to the sum of 5% of adjusted gross income over $200,000 plus 3% of adjusted gross income over $500,000.

• Lastly, the use of special valuation rules for farm property would expand and the current $750,000 adjustment would increase to $3,000,000. This would apply to estates where the decedents died and made gifts after December 31, 2024.

With more than $84 trillion expected to be transferred down through estates in the next few decades, and with the potential of the estate tax benefit being halved, families are wondering if they should accelerate their gifting to take advantage now.

While this can be a smart strategy for some families, there are other factors to take into consideration including family composition, personalities, and the amount of financial responsibility of each party involved. For instance, are the gifters young enough that they could outlive their money if they gift too much? Or are the giftees too young to take good care of the family assets? In these cases, there may be other options like setting up trusts for younger children that will provide them money over time.

Planning ahead will give you time to do what is best for you and your family, whether it is accelerated gift planning and/or setting up trusts. Please contact Hoffman & Associates to discuss the options with our attorneys and tax professionals so we can find the strategies that work best for you.