Congress is planning to make a number of “adjustments” to our basic income and estate taxes, changes that will purportedly impact several commonly used estate planning strategies. That means most convenience store owners, operators, franchisees and executives should get their house in order in preparation for increased federal estate taxes.
After months of proposals for a lower estate tax exemption amount and the possibility that exemption would come down before there was time to make gifts, the time for action has arrived. Fortunately, only a few of the newly proposed rules will impact moves made before new rules are passed, with many taking effect after Jan. 1, 2022.
The proposed rules would eliminate the increased estate and gift tax exemption created by the 2017 Tax Cuts and Jobs Act that doubled the amount of an estate that is exempt from tax. Accelerating changes that were already slated to occur beginning Jan. 1, 2026, after Jan. 1, 2022, the unified estate and gift tax exemption would be reduced to $5 million, adjusted for inflation.
Significant changes have been proposed impacting the treatment of assets transferred to a “grantor trust.” Grantor trusts are trusts where the creator, or grantor, is treated as the owner of the trust’s assets for federal income tax purposes.
As an owner, the grantor pays the income tax on the trust’s assets on behalf of the beneficiaries and can sell assets that may qualify for a discount, such as a non-voting LLC interest, without paying any income tax on the sale.
Because the grantor is considered to be the trust’s owner, transactions between the trust and the grantor are “disregarded,” meaning the assets can be sold or exchanged without triggering income tax consequences.
In other words, the grantor can continue to pay income taxes associated with the trust assets without that tax payment being considered a “gift” to the trust, thus allowing the trust to grow income-tax free and further reducing the grantor’s estate.
Fortunately, grantor trusts remain available as estate planning tools with all of the benefits continuing.
Under the proposed legislation, the highest marginal estate tax rate would remain at 40%. Although no changes will be made to the generation-skipping transfer (GST) tax, the GST exemption would be reduced to $5 million adjusted for inflation.
Most importantly, there is no mention in the proposal of death triggering gain or the elimination of basis step-up at death. Currently, each individual can transfer up to $11.7 million without incurring federal gift, estate or generation-skipping transfer taxes.
Set by the Tax Cuts and Jobs Act of 2017, and adjusted for inflation every year since, under the proposed legislation, the exemption amount would be reduced to $6.02 million after Jan. 1, 2022.
Any convenience store owner, operator, franchisee or executive with an existing trust who is considering making changes should do so now since the new rules will treat decanting — that is changing the trust terms or pouring the trust’s assets into a new trust with modified terms — as a distribution that might be labeled as a gift and subject to the gift tax.
Fortunately, only a few of the proposed rules will impact transactions or transfers made before it is passed, with many not taking effect until Jan. 1, 2022. While the many benefits of trusts remain invaluable, now is the time to act on estate planning.