Musings from the CEO – Summer 2021
By Mike Hoffman, Esq., CPA
Last month, I participated in the Annual Estate and Financial Planning Advisory Council meeting with several of my esteemed colleagues from the Georgia Society of CPAs (GSCPAs). The Council shares ideas with several of the key employees of the GSCPAs to keep them apprised of what is happening in our corner of the industry. There were about a dozen themes that surfaced as a result of our conversation and discourse. Here are some of the highlights.
First and foremost, on everybody’s mind were the many past and future tax law changes. Looking back, one of the most significant tax law changes in the last several years had to do with the Secure Act and its impact on retirement accounts. Principally, requiring a ten-year payout for an inherited IRA has substantially changed the estate and financial planning outlook for these retirement accounts. Consequently, we see a lot of activity, including Roth conversions, IRAs being used for charity, and switching to the use of accumulation trusts, rather than conduit trusts, where a trust is the desired designated beneficiary.
Of course, we are anticipating many significant tax law changes on the horizon. In the income tax area, there could be a doubling of the capital gains rate, an increase in all income tax rates, and many other changes. In the estate and gift tax area, we are expecting a significant reduction in the estate and gift tax exemption, similar reduction of the generation skipping transfer tax exemption, a significant increase in the estate tax rates, and the potential loss of stepped-up basis at death. There may be a per donor limit placed on annual gift exclusions and severe curtailing of GRATs (Grantor Retained Annuity Trusts) and DGTs (Defective Grantor Trusts). It has been proposed to legislate away the dynasty trust concept and require estate tax inclusion every forty to seventy years.
There are many other potential changes in the estate and gift tax arena, and the planning activity occurring between now and the end of the year will be intense. Clients face potential deadlines regarding establishing trusts, that may be prohibited in the future under new laws. The “use it or lose it” frenzy still continues until year-end.
As a result of the economy and potential tax changes, as well as many other circumstances, we are witnessing an increase in business sales. Succession planning has always been a key element in estate planning and the sale of a business is often the appropriate exit strategy. The nuances and complications, as well as the many tax aspects of the sale of a business, will involve a great deal of CPA/tax and legal participation. Obvious matters, such as whether the sale is a sale of stock or a sale of assets, the effect that has on the negotiation of sales price and on the allocation of purchase price are among many areas where we must have our client’s back.
Several years ago, Georgia adopted a 360-year rule against perpetuities that replaced the old common law rule and statutory rule of approximately 90 years. This means that a document, such as a trust or last will and testament, could create trusts running for over ten generations, as opposed to about three. The new trust code also introduced significant decanting and trust modification rules, allowing for the correction and improvement of older trusts. As I wrote many years ago, attorneys and CPAs need to be careful about what they wish for, because now the responsibility is on us to make sure that these old trusts and much of the old planning is updated in light of the new trust code and evolution of tax changes. Those old documents must be updated.
And speaking of trusts, we are seeing a plethora of DGTs, SLATs (Spousal Lifetime Access Trusts), SNTs (Special Needs Trusts), Non-Grantor Family Trusts, Walton Cascading GRATs, CRTs (Charitable Remainder Trusts) and CLATs (Charitable Lead Annuity Trusts), etc. implemented for estate planning, tax, asset protection, and other strategic purposes. The question is, do you understand what all these types of instruments are?
In the area of gift tax, there has generally been a lack of attention paid to the requirement that gifts must be reported on an annual gift tax return (Form 709). If that gift is made to the kids outright, to a spouse, to a trust for the benefit of the spouse, to a trust that pays life insurance premiums for the benefit of a spouse and descendants, or for any other reason, a Form 709 is required. Generally, because of the annual gift tax exclusion of $15,000 per donee, the huge gift tax exemption which has grown to $11,700,000 under the Trump administration, and the lack of ability of the IRS to police the filing of gift tax returns, there is generally no revenue “in it” for a revenue agent to audit gift tax returns, Form 709 filing is going to become a more important matter in the future.
Many of us have always thought the generation skipping tax would die a natural death, certainly by now. It now looks as if the dreaded generation skipping transfer tax will be around for the foreseeable future, therefore, when the trusts we create for our children terminate and new trusts are created for our grandchildren, we may escape estate taxes, but there will be the dreaded generation skipping transfer tax. To avoid this maximum tax rate, planning must occur back when gifts are originally made. This planning is done by allocating generation skipping transfer tax exemption to the gifts that are being made to trusts on behalf of our children and further generations. This is a not a complicated endeavor, but it is one that has far-flung and potentially enormous economic consequences.
Suffice it to say, while the Form 709 has been the forgotten stepchild of CPAs and estate planners for the last 40 years, the filing requirement is coming home to roost. And it is not so much that the IRS is seeking or will get anything out of enforcement, but that certain matters need to be documented concerning the creation and funding of trusts created for planning purposes. The bona fides of generation skipping trusts will be extremely important to skip persons, that is any generation after the next.
The Advisory Council discussed human resource matters, the increasing focus on financial planning, the necessity to update limited partnerships and limited liability companies, various matters affecting probate, life insurance matters, and philanthropy. All of these themes are what is on our minds when it comes to estate and financial planning. Of course, there are more, but my goal is to memorialize what some of my esteemed colleagues think may be the most important areas for planners and clients at the present time.
For more information regarding this or any other estate planning matter, please contact us at 404-255-7400 or info@hoffmanestatelaw.com.
