Since the 1990s the Exemption from Federal Gift and Estate Tax has increased steadily. At one point the Exemption only was $675,000 and you had to either use it at death or lose it. Over the years, the Exemption has jumped periodically until it reached its current level of $11.7 Million and it is scheduled to increase to $12.07 Million on January 1, 2022. Also, we no longer have a “use it or lose it” Exemption. Now the surviving spouse gets to use the “unused” Exemption of the first spouse to die. These changes created new paradigms in estate planning. In fact, many taxpayers with over $20 Million in assets no longer feel they have to do estate tax planning.

In addition to the high Exemption, a number of very powerful estate planning tools are available to taxpayers. GRATs, gifts of non-controlling interests in family partnerships and LLCs at a discount, sales of businesses and other assets to grantor trusts that are exempt from the capital gains tax, gifts to grantor trusts and SLATs (spousal limited access trusts) have made it possible to shift wealth and income tax efficiently to children and grandchildren. But now Congress has threatened to eliminate most of this planning and lower the Exemption dramatically.

Not surprisingly this threat from Congress created a rush to modify estate plans and take action before the proposed changes in the tax law became effective. In the tax bills still being debated by Congress, it was announced that the bill would include the following:

1. Lower the Exemption to around $6 Million from $11.7 Million
2. Change the rules for Grantor Trusts with the result that the value of new Grantor Trusts would be included in the grantor’s tax estate at death and that additions to “grandfathered” Grantor Trusts would result in a portion of the trust being included in the grantor’s estate.
3. The proposed changes in the Grantor Trust rules would effectively end or make much, much more complicated GRATs, Irrevocable Life Insurance Trusts, sales to Grantor Trusts, SLATs and gifts to Grantor Trusts.
4. The proposed changes also would eliminate the discounts on sales or gifts of non-controlling interests in family partnerships or LLCs.

In effect, nearly every major estate planning tool would be either ended or made less effective. No wonder estate planners and taxpayers were hyper as we approached the end of the year.

And then just like that, all of the changes were deleted from the proposed tax bill. Yes, I said ALL OF THE CHANGES WERE DELETED FROM THE PROPOSED TAX BILL. What a sense of deja-vu! This has happened before. Every few years, the Exemption (by statute) was supposed to revert back to a lower level unless Congress agreed to extend the law. It would take an act of Congress to extend the Exemption at its then current level. Taxpayers would line up to make gifts or enter into transactions to “beat” the reversion of the Exemption to a lower level (the “Sunset” clause in Congressional lingo). And then, just as the higher Exemption was about to expire, Congress came through and not only extended the Exemption but increased it to a higher level. BUT always for a limited time period at the end of which it would revert again to a lower level. So we have been through this exercise before.

So, is this time any different? Honestly, it is impossible to know at this time. The heat does appear to be off for the time being. Taxpayers and estate planners can continue doing business “as usual” for now. But for how long?

First, one knows that there is serious intent by many members of Congress to raise money from high net worth taxpayers. These are precisely the people who would be hurt by the changes that had been proposed (but now withdrawn).

Second, there still is the huge human infrastructure bill pending in Congress which may be very difficult to pay for if passed.

Third, the current $11.7 Million Exemption has a planned “Sunset” date of January 1, 2026. So even if Congress does nothing this time, we could still wind up with a reduced Exemption of $6 Million in 2026. So we are not out of the woods by any means for the estate tax change which would affect most taxpayers.

Fourth, there still are pending some income and retirement plan changes that need Senate approval to become law. They are designed to increase taxes on very high net worth taxpayers. If passed without change, there will be (i) a 5% surtax on Modified Adjusted Incomes above $10 Million, (ii) a 3% additional surtax on taxpayers with MAGI above $25 Million, (iii) the Net Investment Income Tax will be broadened and (iv) limitation on IRAs and Roth IRAs for very high income taxpayers. Essentially, very high income taxpayers are being asked to foot the bill for the new legislation. But, it appears that even these tax increases will not be enough to pay for the bill.

So what does it all mean? I think one can conclude that Congress wants to spend more money but cannot figure out how to pay for it. High income taxpayers are a target and can expect more tax proposals designed to raise more taxes and the estate and gift tax surely will be a target. I think we can expect the Exemption to decrease. I also think that there will be changes to the Grantor Trust rules which will be better designed than the first set that were proposed. The first set were a shotgun approach that captured some very mainstream planning techniques which were used by more than just very high net worth families.

If your net worth is in the vicinity of $6 Million ($12 Million for a married couple), you are not likely to be affected by future changes. However, if your net worth exceeds these amounts, you should begin thinking about how to lessen the impact of estate taxes on your family and your business. The estate tax and gift tax rates currently are 40% (plus state inheritance tax depending upon where one lives). These tax rates used to be as high as 60% over the last 30 years. They could be increased for large estates. And if Congress does nothing between now and 2026, then the Exemption will decline by around one-half to somewhere around $6 Million per spouse on January 1, 2026.=

According to the Tax Policy Center, there only were 4,100 estate tax returns filed for people who died in 2020 and only 1,900 of them resulted in an estate tax payable. That is less than 0.1% of the 2.8 Million people expected to die in 2020. Facing facts, not many people need to worry about the estate tax any longer. Those who do are not a very big constituency. I think one can bet that there will be changes for the worse in regard to estate and gift taxation.

In conclusion, Congress did us a favor by eliminating all of the proposed harmful tax changes in 2021. We now have time to be more deliberate in our planning, but the clock is ticking. It will be January 1, 2026 before we know it.

Alan Mittelman and Dana Bernstein are ready to review your situation and help you plan a strategy. Alan’s email is amitt@sgrvlaw.com and Dana’s email is dbernstein@sgrvlaw.com. We look forward to hearing from you.