Photo of Eric R. Ebbert, CFP®, MBA, CEO Eric R. Ebbert, CFP®, MBA, CEO Dec 07, 2021

Advisors throughout the financial services industry, including financial planners, estate attorneys and tax consulting CPAs, are all nervously watching the tax proposals that are working their way through Congress. This includes warily watching the progress of the Biden estate tax plan.

Why are they nervous? For one thing, at this late hour, it is very difficult to make plans or last-minute changes to mitigate any tax changes. This includes actions like moving deductions and income from one tax year to another. As a result, it may be especially hard to make estate planning decisions that would help people save their heirs from significant tax obligations.

Who would these changes affect the most?

The estate planning implications are especially severe for a certain group of individuals. This group includes many of those who have a higher net worth. Under the Biden estate tax plan, the amount exempted from federal estate taxes would drop from $11.7 million per individual to somewhere around $6 million. Anything over that would be taxed at a 40% rate.

How could these changes affect the trusts financial planners use to reduce estate taxes?

There are many ways that financial planners can work within the current laws to help reduce your estate taxes. One of these is several varieties of trusts. However, many of the commonly used trusts would be impacted by the proposed Biden estate tax plan. Here are some of the ways the top trust types may be affected: 

Grantor trusts

One popular remedy for reducing estate taxes is to create a grantor trust. This is where a person or couple moves some part of their net worth into a trust vehicle, taking it out of their estate. Yet they still remain the owner of the assets in the trust for income tax purposes. The grantor(s) pay taxes on the income generated in the trust, which gets even more money out of their estate and raises the value of the trust to the heirs. The reason? The heirs are not having to pay income taxes on the money in the trust. In addition, under current rules, if an asset appreciates inside the trust, the grantor who put that asset into the trust can buy it back out without tax consequences and hold it until death. This creates a step-up in basis that would help the grantor avoid capital gains taxes.

Under the proposed Biden estate tax plan, that simple estate-planning technique would be off the table — possibly as soon as January 1 of next year. At that point, assuming the tax proposal passes Congress in the next month and a half, the full value of the assets in a grantor trust would be included in the grantor’s estate. And any sale transactions between the grantor and the trust would be subject to income taxation as if the transaction had been executed with a third party. Moreover, any distribution from a grantor trust to any beneficiary other than the grantor or the grantor’s spouse would be treated as a taxable gift to the recipient.

Spousal lifetime access trust (SLAT)

The same limitations would be imposed on a spousal lifetime access trust, another common vehicle for people to move money out of their estate. The SLAT, as professionals refer to it, would collect assets from one spouse for the income benefit of the other spouse. But once again, if it is established after the date of enactment of the proposed law, all those assets would be included in the grantor’s estate at death. As a result, those assets would be subject to estate taxes. 

Grantor retained annuity trusts (GRATs) & qualified personal residence trusts (QPRTs)

Grantor retained annuity trusts, or GRATs, are where the grantor puts money into a trust and receives annuity payments back. GRATs are another tax-reduction option that would be hit hard by the proposed law. Qualified personal residence trusts (QPRTs), where the family would put the family home into trust on behalf of the heirs, would be similarly affected. Under the proposed Biden estate tax plan, these assets would be included in the grantor’s estate at death. Thus, they would be exposed to estate taxes. 

There is still time for people with more than $6 million in wealth to set up and fund a grantor trust, a SLAT, a GRAT or a QPRT. But that time could be running out if the Biden estate tax plan becomes law.

Talk to a ProVise CFP® professional about how your estate and trust planning could be affected by the Biden estate tax plan

At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.

Are you ready to talk to a professional about how you can adjust your planning if the Biden estate tax plan goes into effect? Contact ProVise today to schedule a complimentary consultation.