Across the country one of the hardest appointments for the wealthy to get this past summer wasn’t reservations at a hot restaurant or seats for a sporting event. Rather the most sought-after appointment was one with their estate and tax attorney. The reason is quite simple: the current version of estate tax law was about to be changed.
“The tax bill released by the House Ways and Means Committee in the middle of September provided for the early sunset of the Trump tax cuts with respect to the estate and gift tax system,” explains Michael Gordon, managing partner of leading estate planning firm Gordon Fournaris.
In simple terms, the amount every American can pass free of tax at their death would be significantly reduced starting in 2022.
As a result, for Americans whose asset base exceeds $10 million, a frantic rush to the estate planner’s office has occurred. From Spousal Limited Access Trusts (SLATs) to grantor trusts, everyone with means was looking to add techniques to their estate plan to grandfather into the higher unified credit amount that was created under the Tax Cuts and Jobs Act of 2017 (TCJA).
And just as suddenly as everyone rushed to make changes, everything changed. What exactly happened at the end of October?
“The latest version of the tax bill removed all provisions relating to the estate and gift tax system and grantor trusts,” said Gordon. “It appears that the enhanced lifetime exemption will remain in place in 2022 and grantor trusts will still be an effective way to shift wealth to the next generation.”
This was a huge relief to wealthy families. To be fair, only a very small group of Americans will even have a taxable estate – usually it is less than 0.1% of deaths annually. But wealthy families should be thinking about potential changes that might still be looming.
A Unique Estate Planning Moment
To be clear, the past few years have been a unique period in estate planning. When the TCJA was passed in 2017 it completely upended the size of estate that was subject to the estate tax. Previously, each American could pass $5 million at their death or $10 million per married couple indexed for inflation. TCJA more than doubled the unified credit amount to $11.18 million per person or $22.36 million per married couple (indexed for inflation.)
By 2021, the exemption had increased to $11.7 million per person or $23.4 million per married couple. Per the Tax Policy Center, there were 1,900 families subject to the estate tax in 2020. The TCJA change to the unified credit was scheduled to expire on December 31, 2025, reverting to the original amount of $5 million per person plus inflation.
For wealthy families, the increase in the exemption was a big win and they had until 2025 to adjust their estate plans – until this recent round of potential legislation.
“The proposal would have decreased the exemption back to $5 million per person, indexed for inflation, starting in 2022. The tax bill also included a provision which would render grantor trusts ineffective,” says Gordon. “As such, many wealthy Americans have been scrambling over the past month or so to use their remaining lifetime exemption amounts and fund grantor trusts before the clock runs out.”
What Should Wealthy Individuals Do Now
At the moment, it appears any immediate changes are on hold. But that doesn’t mean wealthy families can be complacent. In fact, they should be even more motivated.
“The vast majority of my clients that have started this process want to complete and fund their trusts by the end of 2021,” says Gordon. “I have some clients that are going to push the planning until early 2022.”
One of the main reasons most have continued to move forward is that the use of certain techniques makes sense for the long term for these families. While the threat of a deadline speeded things up, the concept is important for wealth families.. Those still on the fence will need to determine if this type of estate planning is necessary for them.
“I would advise wealthy clients who have not used their full lifetime exemption amounts to do so by the end of next year as who knows what the future holds,” said Gordon. “2022 should be safe but after that all bets are off.”
Ultimately the current situation might be just a respite before a change in the estate tax does occur.