COVID-19 Update: You can do Your Planning From Home

Colorado Residents Must Respond to Major Estate Tax Proposal

Members of the U.S. Congress recently proposed a striking $3.5 trillion spending plan that, if passed, would be funded largely through a significant tax overhaul. Here is what Colorado residents need to know about the tax increase proposal as it currently stands.

Reduction in the Unified Credit Amount

Effective in 2022, the current proposal halves the estate and gift tax exclusion. This change essentially reverses the Tax Cuts and Jobs Act’s recent change to the exclusion and will affect Coloradans with large estates.

The estate tax exemption affects wealth transfers at the time of death by allowing the deceased person to transfer up to a certain amount of her assets without being subject to the estate tax. Similarly, the gift tax exclusion lets living people transfer up to a certain amount of money without having to pay gift tax. Both exclusions are important tools in the estate planning toolbox.

Importantly, the federal gift and estate tax exclusions operate together. The lifetime amount that someone claims on the gift exclusion reduces the total that can be claimed for the estate exclusion.

It seems likely that this portion of the tax increase proposal will remain intact. Accordingly, single and married individuals with assets greater than $6 and $12 million, respectively, as well as people whose assets may obtain those amounts over time, should seriously consider making large gifts before the end of 2021. This strategy is worthy of careful consideration since it will maximize the current exemption amount.

Crackdown on Grantor Trust Planning Strategies

In its current form, the tax proposal will restrict grantor trusts dramatically, with some of the restrictions beginning as soon as the bill is passed into law.

Grantor trusts have long been the backbone of estate planning. With a grantor trust, the income in the trust is taxed to the person who created it. One type of grantor trust—the intentionally defective grantor trust—removes any assets contributed to the trust from the estate of the person who made it. In this way, the grantor enjoys both planning benefits during her life as well as estate tax planning benefits upon her death.

Although the current language of the proposal is somewhat unclear, it seems as though intentionally defective grantor trusts will no longer be a viable strategy. These restrictions will be effective for any trusts drafted as of the bill’s enactment. Therefore, there may be only a short window of time to take advantage of this important planning tool.

The proposal also treats transfers between a grantor and a grantor trust she creates as sales. In other words, the new law would treat this type of transfer as though it occurred between the grantor and a third party. This treatment triggers capital gain while depriving the grantor of recognition of a loss. It also harms a grantor’s ability to “swap” assets of equal value, a strategy commonly employed to save taxes on high-basis assets. This second portion of restrictions will apply to amounts funded after the bill becomes law.

Elimination of Valuation Discounts for Nonbusiness Assets

The tax proposal will prohibit the use of valuation discounts for the transfer of nonbusiness assets, including passive assets like cash and marketable securities. The transfer of nonbusiness assets—like transferring a marketable securities portfolio into a family limited liability company—has long been used to reduce the value of the non-controlling entity to minimize the tax burden.

Moreover, the proposal limits the use of valuation discounts by taxpayers who purchase an entity with special features, like lack of marketability or minority ownership.

The elimination of this discount is a major change in the law that will block an estate holder’s ability to compress the value of her assets before gifting them to the next generation. Critically, this part of the proposal will take effect immediately after the spending bill becomes law. For those seeking to maximize wealth transfer to the younger generations, the time to act is now.

Colorado residents must be prepared for each of these major changes to taxation coming down the pike.

Consult a Colorado Estate-Planning Attorney to Protect Your Assets

The Braverman Law Group is watching these developments in Washington, D.C. closely in order to protect Colorado estate planning clients who will be negatively affected. If your total net worth, including life insurance benefits, exceeds $6 million, contact the Braverman Law Group while there is still time to act. Beginning next year, the forthcoming reduction in the unified credit amount will severely impact your ability to claim the gift exclusion, costing you and your family untold amounts. To schedule a free consultation with an experienced estate planning attorney, call 303- 800-1588.

Justia Lawyer Rating
Super Lawyers
Colorado Bar Association
Wealth Counsel
Avvo
Avvo
NAELA
SCInstitute
Boulder County Bar Association
Contact Information