Dear Client:

Dear Client:

Dear Client:

For the most part, I don’t clutter your inboxes with tax proposals that may not be enacted. Until legislation is passed, we don’t really know what will survive the political process. However, there are so many tax proposals afoot, it seems prudent to know what may be in the offing, so you can capitalize on planning opportunities that exist now.

Proposals Explained. The President’s budget proposal is known as the “Greenbook.” Proposed tax changes include:

  • Biden’s proposal will increase tax capital gains at ordinary rates if the adjusted gross income exceeds $1 million.
  • This prposal would cause a huge increase in tax (40% not 15/20%) on the sale of businesses, real estate or other assets.
  • This rate may be increased by the 3.8% net investment incme tax, in addition to state and local tax.
  • Prposed effective date is April 2021, when the possible change was announced.
  • Normally property appreciation is not realized (or taxed) until a sale occurs. Biden’s proposal causes gain realization upon gift, death, termination of trusts and certain funding of partnerships, LLCs and other entities.
  • As a result, instead f a step-up in income tax basis on death, all appreciation above an exclusion amount could be subject to capital gains tax.
  • The capital gains tax would be in addition to any estate tax. though there may be a credit to offset potential double taxation that would otherwise occur.
  • Prposal triggers recognition of gain when trusts terminate, even if assets continue in further sub-trusts.
  • A decrease in the federal estate tax exemption can be expected from its present value of $11.7 million to somewhere closer to $6 million under Biden’s proposal.

Sanders’ proposal would reduce the estate tax exemption to $3.5 million, with only $1 million for lifetime gifts. Under the current law, lifetime gifts and estates left at death are eligible for the $11.7 million exclusion. Other changes introduced by Sanders’s proposal:

  • Transfer tax rates could increase from 40% to 65%.
  • The annual gift tax exemption of $15,000 per person to whom a gift is made (“donee”) will be limited on gifts to trusts to $30,000 total/per year.
  • New limit of 50 years that dynastic trusts can avoid estate and/or generation skipping transfer taxation. In short, in year 50, the trust would no longer be GST exempt. This could reduce the desirability of dynasty trusts in estate planning.
  • Discounts when valuing intra-family gifts could be reduced or eliminated. This might make it advantageous to complete transfers out of your estate before the law changes.

Other Proposals:

  • Imposition of capital gains tax on unrealized gains upon transfer by gift, at death or every 21 years for assets held in trust. Proposed effective date is January 1, 2021.

Planning Based on Proposals. When it comes to taxes, planning for what might be is more involved than bringing an umbrella in case of rain or even putting up hurricane shutters. With tax legislation, the long-standing issue is when will a law change take effect.

Proposals are rarely enacted retroactively, but sometimes they date back to when the concept was initially introduced as part of the legislative process. For example, the taxing of capital gains at ordinary rates reared its ugly head in April, so there is talk any law change on rates could date to transactions after this date. Time will tell.

The new proposals introduce concepts that would dramatically affect tax planning. These affect what is considered a taxable event and what transfers are subject to estate and gift tax. Specifically:

  • Historically, gain/loss on property is only realized when the property is sold. Under the proposals, a tax “recognition” event could occur on a transfer via a gift, death, termination of trusts and funding of LLCs and other entities. This is a very new game-changer.
  • As a result of the high estate/gift tax exemption (now $11.7 million), few estates pay estate tax. The number in recent years was about 1900 people. If the estate tax exemption returns to a $3.5 million level, or the exemption is limited to $1 million in lifetime gifts, there would be big tax consequences for even middle-class taxpayers.

Planning to Consider. For any client who anticipates combined gift/estate assets may exceed $11.7 million, it makes sense to transfer assets now in a way to use the high exemption before the rate drops. The IRS issued final regulations that there will be no clawback for gifts /estates taking advantage of the high exemption.

The tax gurus offer some other recommendations which may benefit you:
1. Use borrowed funds to fund trusts, instead of transfer of appreciated assets; this may avoid triggering capital gains tax.

2. Include protective language in new trust documents that permit the trustee to “unwind” receipt of gifts or other transfers if the law change would result in to avoid adverse tax consequences, especially with a retroactive change on capital gains transactions. This may or may not work, but it can’t hurt.

3. Consider contributing trust assets, and even many non-trust assets, to partnerships or limited liability companies now in an attempt to avoid a tax that might be triggered on that type of transfer under a Biden proposal.

4. Assets held in an irrevocable trust (other than a QTIP’ed trust) do not qualify for basis step-up on death. Yet, with good planning, you may be able to swap out appreciated assets so that they will be included in the settlor’s estate to gain a basis step-up on death. This language should be in an irrevocable trust.

5. If you fund life insurance trusts with annual exclusion gifts ($15,000 per done), you may be better off making gifts now to fund insurance trusts.

Please contact us at or (914) 923-1600, if you would like to review your plans and consider changes.