ALERT: End of Year Estate, Gift and Income Tax Update

Estate and gift tax changes. In 2012 there was concern that the estate and gift tax exemption, which was then $5.12 million, would be reduced and, therefore, the opportunity to make gifts up to $5.12 million would be lost. As a result, substantial gifting occurred by taxpayers near the end of 2012. In fact, the gift tax exemption actually increased. Today the gift and estate tax exemption is $11.58 million per individual, or $23.16 million for a married couple. Currently the exemption is inflation adjusted each year. Under the current law, the exemption reduces to approximately $6 million beginning January 1, 2026.

There is again concern that the estate and gift tax exemption will be reduced. The consensus opinion is that a Biden administration will attempt to substantially reduce the exemption and increase the rate of tax from 40% to 45%. In fact, Biden proposed reducing the exemption to $3.5 million per individual and eliminating the adjustment in the tax basis of assets to fair market value that currently exists at death.

In addition to traditional gifting (outright or in trust), another alternative to utilize the exemption now is the transfer of assets in trust of up to $11.58 million from one spouse (Donor Spouse) to the other (Donee Spouse). This type of trust is called a spousal limited access trust (“SLAT”). The terms of the trust could be, for example, as follows:

Trustee: Donee Spouse is the sole trustee.

Terms:

Donee Spouse has discretion to distribute to himself or herself the income and principal of the trust for health, maintenance and support.
Donee Spouse’s interest in the trust terminates either upon divorce or upon death and the interest in the trust then passes in trust for the benefit of children or others.
The trust can (i) continue in perpetuity, (ii) terminate during the lifetime of the children or others or (iii) terminate during the lifetime of any succeeding generation.

Benefits:

The assets in the SLAT, including the increase in value, will not be subject to federal death taxes.
If the estate and gift tax exemption is subsequently reduced below $11.58 million then to the extent the gift to the SLAT exceeds the reduced estate and gift tax exemption, the Donor Spouse will have benefited by permanently utilizing the differential. However, at death under the current law, assets that are subject to death taxes receive a new adjusted tax basis equal to the fair market value of the assets. Because the assets transferred to the SLAT are not subsequently subject to death taxes, the SLAT assets would not receive that basis adjustment. However, the Biden campaign also mentioned the possible elimination of this tax basis adjustment at death.

Income tax changes. The most significant of the income tax proposals from the Biden campaign are increases in the top marginal rate for ordinary income to 39.6%, increase the rate for capital gains and qualified dividends for income over $1 million to the ordinary income tax rate (39.6%), impose the 6.2% social security tax (for both employer and employee) on earned income over $400,000, and phase-out of the Section 199A 20% business deduction for taxable income over $400,000. All of these provisions may be reason to accelerate income into 2020 should Mr. Biden win the Presidency and Democrats win both the House and the Senate, although any tax increase plans could meet resistance in the Senate, regardless of makeup.

For Further Information:

Please contact one of our Trusts and Estates attorneys listed below if you are interested in discussing any estate or trust tax planning greater detail.