Over the past several months, the U.S. Congress has been considering tax legislation that could drastically change the face of estate planning.
Versions of the Build Back Better bill have included provisions to trigger capital gains tax on a regular basis for assets held in trusts, upon death, and when making a gift. Congress also considered dramatically reducing the unified tax credit, which would have restricted the reach of grantor trusts as an estate-planning tool.
But the bill in its current form does not impact the estate tax system directly. Where does this leave Coloradans who have made changes to their estate plan in response to this legislation?
In general, Colorado estate holders who have begun the planning process in response to Build Back Better have little to fear. This is because the proposed legislation is still just that—a proposal. Until the bill is passed into law, no one can know whether estate tax changes will be included.
Although the bill in its current form does not include any direct estate tax changes, it is wholly possible that Congress will reincorporate some of the dramatic changes it had previously considered in order to pay for the large spending program it envisions.
In addition to the fact that the bill is still in flux, it is also worth noting that the bill in its current form still targets taxpayers with high incomes. For example, the bill contains a special tax of 5 percent on those with incomes above $10 million, along with an additional 3 percent surtax for those with incomes above $25 million. The 5 percent tax will also apply to trusts with very modest incomes.
If these provisions remain in the final version of the bill, then trusts will still need close monitoring and adjustments.
First, moving forward, it may be advantageous to allow trusts to make charitable contributions from gross income since these contributions could qualify for the charitable contribution deduction. However, this technique will only be available to trusts that explicitly permit contributions in the original language of the governing instrument. Otherwise, a viable strategy to obtain the benefit of the deduction may be to contribute trust assets to partnerships that pay charitable contributions.
Second, non-grantor trusts that may be subject to the 5 percent surtax would be wise to review their tax status before the New Year. This includes evaluating gains and incomes, the tax status of those figures, and possible distributions. Carefully calculated distributions could result in substantial savings over the long run.
Finally, when drafting trusts in the future, planners should consider strategies like including more flexible classes of beneficiaries in the governing language. Doing so would allow trusts to distribute income to beneficiaries in lower income tax brackets in order to avoid harsh surtax rates.
Despite the headlines, those with substantial estates should still be meeting with qualified professionals in order to plan appropriately for upcoming changes to federal law. Law firms specializing in estate planning can help you protect your estate for yourself and future generations.
Contact a Colorado Estate-Planning Attorney
If you are a Colorado resident with a pre-existing estate plan or wish to begin the estate planning process, contact the Braverman Law Group today to get started before the New Year. There is still time to engage in proactive planning before Congress once again may unsettle estate-planning techniques. The Braverman Law Group has an excellent track record of helping Coloradans like you plan strategically to ensure peace of mind for the future. Although our attorneys are recognized as some of the leading estate-planning attorneys in the country, we pride ourselves on individualized attention and sustained relationships with each one of our clients. To set up a free consultation, call (303) 800-1588 today.