Estate Planning Issues to Address New Texas Proposals

In May 2021, the Biden Administration announced its “Green Books” which includes a summary of the administration’s tax proposal. Even though this is just a proposal and not actual legislation, it’s critical to understand that the administration is focused on taxing high net worth individuals at a higher rate than the previous administration. 


    Most notably, this proposal does not include an increase in the estate tax or federal gift rates. Several other important proposals, however, would greatly alter the fundamental aspects of estate planning strategies by substantially reworking capital gain taxation regulations. It remains uncertain, however, whether the proposals in this “green book” will end up being passed into legislation. The proposed date at which these measures will become effective is January 1, 2022, though. To better prepare you for what lies ahead, this article reviews some important details to understand about the proposed changes.


Treat Gifts of Appreciated Property as Realization Events


    Current law states that lifetime gifts and transfers of assets do not result in a trigger of gain. A recipient of a gift receives a “carryover” tax basis for the asset while appreciated inherited assets receive a “stepped-up” basis to fair market value at the time of the asset owner’s death. This eliminates capital gains tax on any appreciation. In accordance with this new regulation, gifts of appreciated assets trigger an immediate recognition of taxable gain at the time of the transfer.


Realization of In-Kind Transfer to or from Trusts


    In-kind transfers of assets to or from trusts and transfers to or from other pass-through entities lead to a recognition of gain. The gain on revocable trust assets would also be recognized if a trust becomes irrevocable at the time of a donor’s death. 


Capital Gain Recognition of Dynasty Trusts


    Dynasty trusts recognize gain on unrealized appreciation provided the property has not been subject to a recognition event within the last 90 years. This 90 year period would result in December 31, 2030, being the first possible date of a trust’s recognition event. 


No Valuation Discounts for Deciding Gain


    Gifts of partial interest under this proposal are assessed at the proportional share of the fair market value of the entire property. This means that no valuation discounts would exist for the transfer of partial interests. 


How Estate Plans Will Be Impacted


    It’s a good idea to review your estate planning before the year’s conclusion. Some of the estate planning strategies that you could utilize to reduce the impact of these changes include:


  • Gifting assets or cash with a high tax basis can be utilized to minimize the exposure to capital gain recognition 
  • If you plan on utilizing an irrevocable grantor trust, you should do so in 2021 to take advantage of any benefits that might be provided for trusts established before the proposed legislation becomes effective 
  • People who own certain business or real estate interests should consider the merits of transferring interest before the year’s end 
  • Taxpayers should make use of available exemptions, particularly generation-skipping transfer taxes


Speak with a Knowledgeable Estate Planning Attorney


    Depending on your life goals, your estate plan can change drastically. One of the best steps that you can take in such a situation is to speak with an experienced lawyer. Contact Ettinger Law Firm today to schedule a free case evaluation.

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