The Democratic sweep of the Georgia Senate elections has significantly increased the odds that President Biden will institute changes to the estate tax regime in the near future. The possibility of such shifts, combined with current economic conditions, makes this a critical time to review and potentially revise estate planning and gifting strategies.

Use It or Lose It

The Tax Cuts and Jobs Act (TCJA) almost doubled the current federal gift and estate tax exemption. For 2021, the inflation-adjusted exemption is $11.7 million (effectively $23.4 million for a married couple). But these high exemptions are scheduled to sunset and return to the pre-TCJA limit of $5 million on December 31, 2025 — and Biden has proposed returning them to their inflation-adjusted 2009 amount of $3.5 million ($7 million for a married couple) before the TCJA provisions expire. He also favors a top estate tax rate of 45%, up from the current rate of 40%

Taxpayers who fear a reduced exemption should consider making gifts in 2021, while the higher limit remains in effect. The IRS has issued guidance confirming that any gifts made under the increased federal gift and estate tax exemptions under the TCJA won’t be clawed back if the donor dies after the exemption drops to pre-TCJA levels in 2026. Some are concerned, though, that Congress could reduce the exemptions retroactive to January 1, 2021.

Step Up to Avoid Capital Gains Tax

Under current law, assets are valued at the time of the owner’s death. That means an asset’s pre-death value isn’t subject to capital gains tax upon sale by a beneficiary. It may be prudent to swap appreciated assets already in trust (if the trust document permits you to do so) with cash. Since the assets in the estate get a step up in basis, you’d rather give the cash to the trusts (so there is no built in gain) and die with the appreciated assets (so they get stepped up at death).

Biden also has called for a repeal of the step-up in basis at death. Should the step up in basis on death be repealed, this opportunity goes away.

Leverage Low Interest Rates

Interest rates remain at historical lows, and the Federal Reserve has indicated they’re likely to stay there for years as the economy fights to recover from the effects of the COVID-19 pandemic. The low rates may provide several estate planning opportunities.

For example, taxpayers with liquid assets could extend low-interest loans to family members or businesses owned by family members. Such loans don’t affect exemptions and later can be converted to a gift if advisable due to changes in tax laws. The value of the notes on intrafamily loans is frozen in the lender’s estate, but the proceeds can grow outside of it. Essentially, you can grow the assets that were purchased with the funds of the loan at a rate greater than the statutorily required federal interest rate.

Note: An actual expectation of repayment, an intent to enforce the debt and other formalities are necessary if a transaction is to qualify as a loan for tax purposes.

Taxpayers also could sell assets to defective grantor trusts in exchange for a note with the lowest allowable interest rate (the applicable federal rate). Grantor retained annuity trusts can pay off when interest rates are low, too.

Check out our blogs on these estate planning tools- Intentionally Defective Grantor Trust (IDGT): Estate Planning Tool and Grantor Retained Annuity Trust (GRAT) – Estate Planning Tool

Act Now

While the Biden administration has a packed agenda that might not rank changes to estate and gift taxes near the top, estate planning isn’t a quick process. Now is the time to contact our Private Client Services Team to prepare for potential changes in the laws and your strategies.