CPA Practice Advisor - 32

FEATURE

Post-Election Tax Planning
Considerations for Trusts & Estates
By Joshua Kaplan and Jeff Kolodny

IN THE WAKE of the 2020 election, many expect that the Biden administration will seek to engage Congress to enact new tax legislation in order to
raise revenue to pay the costs associated with the pandemic and other
government programs.
The administration's ability to set policy
will be impacted by the final results of several
Congressional elections, and while we can only
speculate on any proposed changes, based on
prior policy statements by Biden's campaign and
the Democratic Party, the following changes are
likely under consideration.

REDUCTION IN EXEMPTION
AMOUNTS
The estate, gift tax and generation-skipping
transfer (GST) tax exemptions are presently
$11,580,000 (indexed for inflation) and are scheduled to increase for inflation to $11,700,000 in
January 2021. Absent any legislative action, the
exemption amounts are scheduled to revert to
approximately $5,850,000 (plus inflation) in 2026.
If, however, Congress takes immediate action,
the exemption amounts could revert to 50% of
current levels (or to even lower levels) as soon
as January 2021. Individuals who are considering using their exemptions may wish to make
gifts now to take advantage of the current high
exemption amounts before the end of the year in
case they revert to lower levels in 2021.

INCREASE IN TRANSFER TAX
RATES
The estate, gift and GST tax rates are presently
40%. Proposals have been made to increase
rates to as high as 55%. Individuals considering
making gifts that will cause them to incur gift
tax should consider doing so now in order to lock
in lower rates.

INCREASE IN INCOME AND
CAPITAL GAINS TAX RATES
One of the most likely changes in the tax law
will be an increase in tax rates. For example, the

DECEMBER 2020 ■

Biden campaign has proposed taxing long-term
capital gains at ordinary income rates for taxpayers with income over $1 million. Taxpayers may
wish to employ certain techniques, such as selling appreciated assets and deferring deductible
expenses, to minimize the impact of an increase
in tax rates. The potential advantages of such
strategies must be carefully weighed against:
(i) the certain cost of incurring additional taxes
now; and (ii) the potential loss of a " step-up " in
basis on assets owned at death (there also is a
proposal to eliminate the basis step-up).
Kleinberg Kaplan's Tax Department will
feature a more detailed discussion of income
tax planning opportunities to consider before
year-end in its annual analysis to be published
this week.
Visit Kleinberg Kaplan at www.KKWC.com.

LIMITATIONS ON GRATS
A grantor retained annuity trust (GRAT) is a
trust to which the donor contributes property
and retains the right to receive an annuity
payment from the trust for a fixed term. The
principal benefit of a GRAT is the ability to
transfer appreciation in excess of a specified
rate of return (currently 0.4%) to individuals or
to trusts that are not includible in the grantor's
taxable estate. Two potential changes to the law
governing GRATs are:
* Minimum Terms: With rare exceptions, GRATs
are only effective if the grantor survives the initial
annuity term, which must be at least two years.
Congress may require a longer minimum annuity
term for GRATs, such as 10 years.
* Minimum Gift Value: If the value of the retained
annuity payments from a GRAT is close to or equal
to the value of the property contributed to the
GRAT, the creation of the GRAT results in little or

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no taxable gift. Congress may change the law to
require a minimum gift, such as 25% of the value
of the property contributed to a GRAT.
Individuals who have been considering funding GRATs may want to create them before the
end of 2020.

TIME-LIMIT ON GST EXEMPTION
At one time, almost all states limited the maximum duration of a trust to about 90 years by having a " rule against perpetuities. " Many states have
lengthened this period, or repealed the limitation
entirely. By allocating GST exemption to a trust
that is not limited by a rule against perpetuities,
the trust assets may be held in trust indefinitely
without being subject to future transfer taxes.
Congress may seek to limit the duration of an
allocation of GST exemption to 90 years. Individuals who are considering making gifts to trusts
and allocating GST exemption may wish to do so
now to take advantage of current law.

NEXT STEPS
Separate from the election, we continue to
encourage individuals to consider taking advantage of the current low-interest rate environment
before rates rise at some point in the future.
A number of estate planning techniques are
especially effective when interest rates are low,
such as loans, installment sales and charitable
lead annuity trusts (CLATs).
It is important to note that if the Democrats
hold a majority in the House and the Republicans hold a majority in the Senate, any new
tax legislation is likely to require significant
compromise by both parties. Even so, current
conditions provide a potentially small window of
opportunity to take full advantage of a number of
extremely effective estate planning techniques.
In many cases, these techniques will prove effective regardless of whether there are any changes
in the tax law. ■
Joshua Kaplan and Jeff Kolodny are partners with the legal
firm Kleinberg Kaplan, which has a national and international reputation for representation of private funds.

http://www.KKWC.com http://www.CPAPracticeAdvisor.com

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