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2022 STRATEGIC TAX PLANNING
PLANNING FOR DEATH TAXES IS NOT DEAD!
By: Simon Levin, Esq. and Donald A. Kress, Esq.
With the failure in the Senate of President Biden’s “Build Back Better” (“BBB”) legislation ro pass, which already had dropped literally all of its original Draconian estate and gift tax proposals, the opportunity for creative and meaningful death tax planning is more alive than ever. After a short collective sigh of relief, taxpayers need to focus quickly on the facts that not only are all of the well-known planning opportunities still available, but, due to on-going adjustments for inflation, many of the benefits actually have improved.
For 2022, the federal gift, estate and generation – skipping tax exemptions (the “Exemptions”) again have increased, this time to $12,060,000 ($24,120,000 for a married couple) from
$11,700,000, and the gift tax annual exclusion has increased to $16,000 from $15,000. On the other hand, the option under the CARES Act for donors to elect to deduct cash gifts to public charities up to 100% of their AGI was not extended past 2021.
However, for those procrastinators who did not do their planning during 2020 and 2021 and who might be gloating, the clock is still ticking. President Biden has vowed to revive his BBB legislation. Who knows what form it may ultimately take? His FY2022 Budget Request to Congress proposes legislation to tax immediately unrealized appreciation on assets transferred by gift, bequest, or charitable donation or, at certain intervals, held by trusts. Something could also come from an overly aggressive Internal Revenue Service (“IRS”).
One thing we do know, even without gridlock in Washington, is that if nothing happens, at the stroke of midnight on December 31, 2025, the existing law requires that the Exemptions drop automatically to approximately $6,020,000 per individual, their 2010 level indexed for inflation.
Non-Legislative Reasons To Act
In today’s environment, there exist two very favorable, but transient, situations that enhance effective proactive estate planning, neither of which depends on the outcome of legislation: unprecedented low interest rates and the benefit of compound earnings. Low interest rates, while they last, are one of the most potent estate tax planning tools available.
Compounding is the miracle of time and the cornerstone of great investing. One doesn’t have to be an Einstein or Buffet to realize that starting early and compounding is also a cornerstone of successful estate planning.
Most importantly, the procrastinator has failed to take into account the most powerful incentive of all to act one’s own mortality! Mortality represents the potential loss of “opportunity”: the lost opportunity to create and use discounts; the missed chance to acquire needed life insurance while younger and healthier; the delayed choice to relocate to a state with no income, estate or inheritance taxes and the foregone benefits; possibly wasting the chance to make considered decisions as to fiduciaries (guardians, executors, personal representatives and trustees); missed opportunities to share, aspirations and values with family, etc.
Preparations For Planning
Rather than reviewing here all of the planning techniques which we and others have done extensively, and which are readily available1 For reading, this analysis briefly addresses only how to approach your planning and some key points to make your planning most effective and not result in unexpected surprises or unintended consequences. It assumes that if you are reading this, you have read some of the numerous prior articles and have some understanding of the basic concepts, such as ‘step-up” in basis.
In order to get started, a comprehensive inventory of assets, including life insurance policies, retirement plans and valuable personal property, is needed.
Then, generally allocate those assets among three groups: those you must have to maintain your lifestyle and security; those you could part with but feel you may need or want access to; and those which you could part with without having any effect on your security or further needs.
Planning In Action
Know that a qualified estate planner, using a combination of the large exemptions, discounts,2 low-interest loans and financing, along with refined techniques and actuarial calculations, can arrange estate and gift tax-free transfers and/or the “freezing” of extremely large amounts of assets at current values.
What if a proposed transaction falls into the second category into which you categorized your assets, namely, may need or want access? See, “Preparations For Planning” above. The trust utilized could take the form of what is known as a “Spousal Lifetime Access Trust” (“SLAT”). Instead of descendants being the sole beneficiaries, as they would be if the property fit the category of property that could be parted with without impacting your security of future needs, the grantor’s spouse is made a beneficiary with access to benefits for his or her lifetime. There are numerous variations on the SLAT which can address almost every imaginable need or scenario. For example, this plan is fine if your spouse survives you. But what if there is a divorce or the beneficiary spouse does not survive the grantor. How about two (“non- reciprocal”) SLATs, one for each spouse? Ask your advisor!
1 See Miami Herald, Business Monday, December 14, 2020, Levin and Kress, “How the Georgia Senate Race Can Impact Your Tax Planning;” Levin and Kress, “Twelve Potential Biden Tax Changes to Keep an Eye On,” March 18, 2021, Wealth Management Magazine, WealthManagement.com; and Kress, Levin and Unger, “2021 Strategic Tax Planning”, “Impact of House Ways and Means Committee Tax Proposals on Your Tax Planning Strategies”, Coral Gables Trust Company Newsletter, October 8, 2021.
2 Qualified appraisals should be obtained supporting any valuation including discounts.
The Safety Value
What if after doing planning, there occur changes in the law which can adversely affect that planning and even create unexpected tax liability? In any planned transfer, by gift or sale, consideration should be given to carefully incorporating an easy to implement “Qualified Disclaimer”. The Internal Revenue Code, Sec. 25183 provides that property for which a transferee did not accept any of the benefits and, which, within nine months of the transfer is irrevocably refused by the transferee will be treated as if it had never been transferred at all to the transferee. Sort of a possibility for “no harm, no foul.” Certainly, it should become apparent within nine months after any transaction as to whether there is any problem.
Planning For The Unavoidable Tax
In many cases, despite the best planning, there may still be enough assets remaining in one’s estate to create possible estate taxes (or any other taxes Congress can create). Second-to-die or survivorship life insurance, which pays on the death of the second of two lives, purchased by a specially created irrevocable life insurance trust (“ILIT”) can be a viable and cost-effective solution. Low interest loans (described above), as long as they last, may be an advantageous way to fund future premiums. Using the current large Exemptions to fund the ILIT with assets which would provide significant income or whose principal over time would be significant enough to fund the premiums indefinitely could eliminate the need for further gifts or loans.
Paying Taxes In Advance Can Be Strategic
Finally, consider the most counter-intuitive concept of all: the paying of a gift tax, intentionally or otherwise, e.g., because the IRS, in an audit, increases the valuation of the gift,4or because of an adverse change in the tax laws, may not be all bad. Such a payment can produce a 50% discount in the ultimate tax liability related to the property gifted! This is because gift taxes are “tax exclusive,” while estate taxes are tax inclusive. When the use of money is a reduced factor (either because of advanced age and/or reduced rates of return on money), the strategic payment of gift taxes, as opposed to the comparable estate tax, can produce substantial benefits.
So, is planning for death taxes dead? No, it’s more alive and urgent than ever! The tax-savings rewards for good planning are significant and the planning client (and beneficiaries thereof) will reap rewards which are well worth the effort.
3 All References are to the Internal Revenue Code of 1986, as amended, and the Regulations promulgated thereto.
4 To minimize exposure to IRS audits, carefully drafted, court approved “defined value clauses” should be considered. Rather than specifying the particular asset being gifted or sold, e.g. 100 shares, a 10% interest, etc., gifts or sales can be stated as being for a “defined value” (amount) of the asset being given or sold, e.g. an amount of shares or an interest in an entity equivalent in value to $100,000. Once the “value is defined” properly with court-approved language, an adjustment by the IRS should only require an adjustment in the unit number in the asset gifted or sold, but not the value subject to tax. E.g., See, Wandry v. Comm., T.C. Mem, 2012 – 88 and King v. U.S., 545 F.2d 700 (10th Cir 1976).