The Importance of Locking in Your “Bonus” Estate Tax Exemption Now

The Importance of Locking in “Bonus” Estate Tax Exemptions Now

With estate tax exemptions under President Trump’s Tax Cuts & Jobs Act more than double previous exemption highs, many are taking proactive steps now to lock in so-called “bonus exemption” in anticipation of possible dramatic changes after the election.  The current law (exemption $11.58MM per person or just shy of $23.2MM per couple) is scheduled to “sunset” at the end of 2025 with a reversion to $5MM per person (likely close to $6.5MM with the anticipated inflation adjustment). If re-elected, President Trump would like to make the Tax Cut & Jobs Act exemption levels permanent or at least extend through his second term.  Vice President Biden’s plan includes a significant reduction of the exemption, likely between $3.5MM to $5MM as well as the elimination of step-up in basis.  Currently, heirs’ basis in inherited assets is stepped up to date of death values of the decedent eliminating built-in capital gains from the decedent’s holding period.*

Estate tax reform is considerably “low hanging fruit” and could be seen as an easy revenue source to partially offset a larger than ever government deficit relative to GDP that has been exacerbated by pandemic-related government spending.  Many Democrats also see increased estate taxes as a first step towards a more equitable tax system.  However, with many issues warranting legislative attention next year (pandemic, healthcare, climate change, etc.) and immediate priorities likely dependent on the state of the pandemic and the economy, estate tax reform might not be at the top of the list.  As such, we could be well into 2021 before any changes to the estate tax law, perhaps with a 2022 effective date; but, very important to note, changes could be made retroactively to the beginning of 2021 leaving just a few months of opportunity to lock in current exemption levels.

Gratus Wealth Advisor Curtis Hearn, CFP® concluded his recent Estate Planning in the 2020 Election Year post by mentioning planning strategies to consider in light of these potential changes.  In this post, we will delve a bit deeper into strategies worthy of consideration with your advisor team and estate planning attorney.

Planning Strategies

To take advantage of the current “bonus exemption,” gifting must be more than levels to which exemptions are expected to fall (i.e., greater than $6MM).  For clients not fully comfortable parting with such large sums through outright gifts to beneficiaries or trusts for their benefit, the Spousal Lifetime Access Trust (SLAT) may have appeal.  With a SLAT, the grantor essentially prefunds their credit shelter trust while living.  Trust terms can be customized but by naming the grantor’s spouse as a beneficiary, some access to the trust funds is available if needed.  The Spouse may even serve as trustee and additional flexibility can be built into the document to provide for divorce as well as planning opportunities such as the power to swap assets of equal value in the future. In addition to locking in 2020 exemption levels, future growth on the assets in the trust occurs outside of the grantor’s estate, most often in a GST exempt trust FBO of future generations.

Family partnerships can be an ideal vehicle for gifting and funding trusts for heirs.  They have many non-tax benefits such as providing a common vehicle for the aggregation of family investments.  In addition to inherent asset protection benefits, separate voting and nonvoting partnership interests can provide an effective mechanism for introducing and spreading family wealth without diluting control.  Additionally, because of valuation discounting often allowed for lack of control and lack of marketability, gifting of partnership units can also be especially efficient from a transfer tax perspective.  It is worth noting these discounts could become more limited under Vice President Biden’s plan.

For clients with a desire to keep significant vacation properties within the family, funding a dynasty trust with a vacation property or properties with a spouse as beneficiary is a strategy worth considering.  As with most trusts, strategy-specific provisions would be incorporated by drafting attorneys.

As previously mentioned, the immediate planning priority for most high net worth clients with the remaining exemption is the utilization of higher exemptions while available through outright gifts, SLATs, or other dynastic trusts.  For clients who have fully used their exemptions, there are several strategies that are especially effective in low-interest-rate environments – grantor retained annuity trusts as well as charitable lead trusts to name a few.

Flexible planning is key, especially with political uncertainty.  In addition to now common disclaimer plans enabling the delay of a decision regarding funding of certain trusts (i.e. credit shelter trusts) until the testator’s death, some attorneys are building other means of flexibility into client documents.  One such method is giving an independent trustee or trust protector the ability to grant beneficiaries more broad powers of appointment over trust assets.  Some trusts name the grantor’s spouse as a beneficiary for additional planning flexibility and access.

Experienced practitioners are having a bit of déjà vu to late 2012 when clients were scrambling to lock in $5MM exemption levels before they were set to expire. Timing is of the essence for any planning to lock in 2020 exemption levels.  In 2012, many attorneys stopped accepting new clients for the year in the fall because they were so busy.  In addition to document drafting, some strategies require coordination of valuation appraisals, new accounting openings, and asset transfers. If you are interested in pursuing any estate planning before year-end, do not delay any further – act now!  If Trump is reelected and Republicans hold on to the Senate, you may have added planning complexity and incurred some related expenses but if Biden is elected and the laws do change, your heirs will be glad you were proactive.  In many cases, the estate tax savings can be in the millions of dollars.  Please let your advisor team know if we can help you think through the applicability of planning strategies specific to your estate.

Jennifer Jones, CPA, CFP®

Estate Planning
Financial Planning Team

*Similarly, another key aspect of Biden’s general tax plan to eliminate tax advantage of capital assets over labor would be the implementation of “mark-to-market” rules for taxpayers with income above $1MM or assets in excess of $10MM.


The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you our your business.

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