President Biden’s Green Book proposals introduce several changes to corporate, individual and estate and gift tax planning, including limits to GST exemption, new rules on GRATs and more. How can you strategize for the remainder of 2022 and beyond? We have some ideas here.

What proposed changes to estate and gift tax planning are on the horizon?

1. Limits to the duration of the generation-skipping tax trust exemption. The GST would only apply to these transfers:
   -Persons no more than two generations below the transferor
   -Trust distributions to such persons
   -Recipients who were living when the trust was created
   
   Strategy: Maximize GST tax planning while you can. One helpful strategy is shifting value to an irrevocable trust and allocating GST tax exemption to the trust. The value of assets in that GST exempt trust (no matter how much they appreciate) will likely never be subject to the transfer tax. Compounding wealth outside the estate tax system can prove very beneficial.
   
2. Taxing transactions between certain grantor trusts and deemed owners. For trusts that are not fully revocable by a deemed owner, the Administration proposes to treat any transfer of assets for consideration as potentially taxable, with the seller recognizing gain on any appreciation in the asset.
   
   Strategy: Complete your sale transactions with your trust ASAP in case this provision of the proposal is passed. Under current law, you can repurchase assets from your grantor trust without it being considered a taxable event. This can be especially beneficial if you are trying to move highly appreciated assets into your taxable estate to maximize the step up in basis to fair market value on your death.
   
   
3. New rules on Grantor Retained Annuity Trusts (GRATs).
   -GRATS will need to have a minimum term of 10 years and maximum term of life expectancy of the annuitant plus ten year
   -For gift tax purposes, GRATS must have a minimum gift value equal to the greater of 25% of the value of assets contributed to the GRAT or $500,000
   -Grantors would be prohibited from acquiring an asset held in the trust without first recognizing gain or loss for income tax purposes
   
   Strategy: Set up a GRAT while they are still a valuable wealth transfer tool. A GRAT is structured to pay you a fixed annuity for a specific term. During the term, you control the assets and enjoy an income stream in the form of the annuity payments. After the term’s end, the assets remaining in the GRAT are transferred to the beneficiaries.
   
   For a GRAT to be an effective wealth transfer technique, the GRAT assets must grow at a greater rate than what the IRS requires you to pay yourself back in interest on the principal, known as the § 7520 rate (3.0% for GRAT’s created in May, 2022). Otherwise you’ll essentially just be transferring the GRAT assets back to yourself through the annuity payments.
   
   
4. More trust administration reporting rules- All trusts with an estimated value over $300,000 at the end of a taxable year or $10,000 of income would be required to report information about its grantor, trustees and general information about the estimated total value of the trust’s assets.
   
   
5. Special Use Property maximum reduction threshold increases to $11.7 million. This is a positive proposal as the threshold is currently $1.23 million. Special use property refers to property that has a limited use and cannot be converted to accommodate another use (without a large investment). This includes property like family farms, golf courses, marinas, and tennis clubs.

Other considerations

Separate from pending legislation, make sure you update your estate plan regularly. Did you recently get married? Do you have a child? Lose a family member? Your will, trusts, powers of attorney and letters of intent might need updating.

We will keep you posted if/when legislation becomes final. For now, take advantage of the high estate and gift tax exemption amounts.

Questions? Contact us.