August 23, 2021 Charles E. Muller II, Esq
Acts
3/1/21 Senator Warren, Ultra-Millionaire Tax Act
3/25/21 Senator Sanders, For the 99.5 Percent Act
3/27/21 Senator Van Hollen, Sensible Taxation and Equity Promotion Act of 2021 (STEP)
5/28/21 Treasury Department, Green Book
Trusts, Estates, Estate Planning Relevant Transactions
1. Funded Revocable Trust.
– transfer to revocable trust or out to grantor or US spouse not gains taxable.
– transfer to anyone else (e.g. a gift to family) is gains taxable to grantor after 2021.
– after grantor’s death transfer in kind to anyone other than surviving spouse or charity is also taxable.
2. Decedents’ Estates.
– estate tax rate?
– exemption reduced?
– taxable gains at death after 2021 (or after 2020 – STEP?). Tax is deductible on 706. Donee takes FMV basis.
– $1 million per-person exclusion of gain for gifts or at death (portable to surviving spouse),
– bequest outright to charity or private foundation not taxable.
PRACTICE POINTS
– for estates of decedent’s dying with surviving spouse before effective date of rate increase, consider paying tax at 40% rate and possible later PTP credit under IRC §2013. Consider disclaimers or foregoing QTIP election.
3. Taxable Gifts.
– gift tax rate?
– exemption reduced?
– taxable gains upon gift after 2021 (or after 2020 – STEP?) Donee takes FMV basis.
– transfer to US spouse or charity or private foundation not gains taxable. Donee has carry over basis.
– $1 million per-person exclusion of taxable gain for gifts or at death.
PRACTICE POINTS
– consider taxable gifts of high basis assets or cash before effective date of rate increase.
4. Annual Exclusion Gifts.
– $10,000 limit per donee, $20,000 limit per donor after date-of-enactment for transfers in trust, transfers of interests in pass-through entities, and others (Sanders).
PRACTICE POINTS
– use ‘em before you lose ‘em.
5. Life Insurance Trusts.
– gift of policy to trust after 2021 is gains taxable, is this a deemed transfer for value?
– post-date-of-enactment grantor trust included in gross estate (Sanders).
PRACTICE POINTS
– contributions to grandfathered trusts? Consider loans, split-dollar agreements, decant to non-grantor trusts before post-date-of-enactment contributions are made.
– new trust should be non-grantor trust or use LLC.
6. Irrevocable Grantor Trusts Including SLATs.
– transfer out to grantor or US spouse or charity after grantor’s death not gains taxable.
– transfer to trust and transfer out to anyone else (e.g. a gift to family) from any irrevocable trust is gain taxable after 2021.
– trust assets of post-date-of-enactment trust or portion of grandfathered trust with post-effective date contributions included in grantor’s gross estate (Sanders).
– no basis step up for transfers after date-of-enactment (Sanders). Does this confirm that property in IDGT previously did get a step up in basis?
PRACTICE POINTS
– consider transfers of high basis assets or cash.
7. GRATs.
– minimum 10 years and gift greater of 25% or $500,000 after date-of-enactment (Sanders).
PRACTICE POINTS
– transfers to GRAT and distributions in kind out of any GRAT to grantor or remainder persons (e.g. trusts for lineals) after 2021 are gains taxable. Distribute high basis assets or cash.
– consider as alternatives after date-of-enactment – partnership freeze, installment sale (IRC §453), gift of high basis assets, or loans of cash for trust investment.
8. QPRTs.
– transfer out to grantor or US spouse or charity after grantor’s death not gains taxable.
– transfer to trust and transfer out to anyone else (e.g. a gift to family) from any trust is gains taxable after 2021.
– The $250,000 per-person exclusion under current law for capital gain on a principal residence would apply to all residences and would be portable to the decedent’s surviving spouse, making the exclusion effectively $500,000 per couple.
– the $1 million per-person exclusion of taxable gain should also be available.
9. Family (and Commercial) Companies, Partnerships and LLCs.
– transfer in kind into or out of trusts, partnerships and other non-corporate entities after 2021 are gains taxable.
– also appreciation of property held for 90 years taxed each 90 years from 1/1/40 i.e. 12/31/2030 (or each 21 years under STEP).
PRACTICE POINTS
– consider Subchapter S corporation as alternative; applies corporate and Sub S tax rules.
10. Sales to and Distributions or Swap from Grantor Trusts.
– gains tax after 2021 (Revenue Ruling 85-13 effectively repealed). Remember Rothstein (2nd Cir. 1984).
EDITOR’S NOTE – does the Green Book proposal of gain recognition apply to a sale to or from a grantor trust or only upon a gift of appreciated assets to a grantor trust?
PRACTICE POINTS
– consider as alternatives after 2021 – partnership freeze, installment sale (IRC §453), sale of high basis assets or loans of cash for trust investment.
11. Dynasty Trusts.
– transfer in kind into trust or out of any irrevocable trust after 2021 are gains taxable. IRC §643(e) effectively repealed.
– appreciation of property held for 90 years taxed each 90 years from 1/1/40 i.e. 12/31/2030 (or each 21 years
under STEP).
– Saunders on GST trusts. 50-year term limit for old trusts, after which inclusion ratio = 1; new trusts post-date-of enactment 50-year term limit or inclusion ratio = 1 ab initio.
PRACTICE POINTS
– distribute high basis assets or cash.
12. CLTs, CRTs.
– gifts in kind going into trust are proportionately gains taxable after 2021. An exclusion would be allowed for the charity’s share of the gain based on the charity’s share of the value transferred as determined for gift or estate tax purposes.
13. Valuation Discounts.
– Green Book appears to disallow discounts to determine FMV for tax of appreciation upon gift or death.
– remember the Regulations proposed under IRC §2704(b)(4) under the Obama Administration and withdrawn during the Trump Administration.
– Sanders bill would eliminate most discounts for estate and gift purposes for transfers after the date-of enactment.
PRACTICE POINTS
– Do it now. Use discounts before you lose them.
– Fund LLC with high basis assets or cash.
– Sale to existing or new grantor trust now.
14. Small Business Stock Exclusion of Gain Would Continue to Apply.
– small business stock is stock acquired after 8/10/93 by original issue from a domestic C corporation engaged in an active business having not more than $50 million of assets at the time of issuance.
– gain on sale of the stock (capped at greater of $10 million or 10X basis) is excluded if taxpayer held the stock for more than 5 years. Gain exclusion is limited to 50% for stock acquired before 2/18/09, 75% for stock acquired after 2/17/09 and before 9/28/10, and 100% for stock acquired thereafter.
– estate planning often involves maintaining the 5-year holding period. IRC §1202 provides tacking of holding periods for transfers by gift, death and certain partnership distributions.
– presumably the Green Book proposal which says that the exclusion for capital gain on small business stock would apply, means that the IRC §1202 exclusion would be allowed upon a gift or testamentary transfer of the stock and upon a distribution of the stock from a trust or partnership.