Tax Alert: Proposed Changes to Federal Estate Tax Laws

On September 13, the House Ways and Means Committee made public its proposed tax plan, the revenue from which would fund President Biden’s “Build Back Better” spending package. This proposed legislation would impact (among other things) estate, gift, and generation-skipping transfer tax exemptions, valuation discounts, and grantor trust rules.The proposals under consideration, if enacted, would most impact a client who wishes to make gifts in excess of $6,000,000 to utilize as much of his or her presently available $11,700,000 exemption as possible before the new law takes effect, and/or who has an existing grantor trust, such as an ILIT, GRAT, SLAT, or QPRT. Clients with estate plans involving only revocable trusts and/or who do not wish to make significantly large gifts do not need to make changes to their plans at this time.Read more about it by clicking here to access our Tax Alert.http://leblancyoung.com/wp-content/uploads/2021/10/tax-alert-10-26-21-final.pdf 

Potential Changes in Federal Estate Tax

The federal estate tax system has undergone significant changes over the past 20 years, but the next 20 months may see even more significant change. When George W. Bush was elected in 2000, estates over $675,000 were subject to estate tax and the top marginal rate was 55%. From 2001 to 2010, the exemptions went up and the rates came down, culminating in 2010 when, for one year, there was no estate tax. In December 2010, Congress re-enacted the estate tax with a $5 million exemption (indexed for inflation) and a flat rate of 35%. Presently, there is a flat, 40%, federal estate tax on estates over $5,490,000 (an 813% increase in the exemption from 2000).Candidate Trump proposed the elimination of the estate tax and the implementation of a plan where “capital gains held until death and valued over $10 million will be subject to tax to exempt small businesses and family farms.” It is not entirely clear when beneficiaries would pay taxes on capital gains: when the assets are received from the estate or when the beneficiary later sells the asset. In any event, President Trump’s plan appears to be similar to the system in place in 2010: estate tax replaced with capital gains and an exemption. As we saw in 2010, this system may require significant changes to estate plans which rely on formula-driven tax language and may result in a rather complicated carry-over basis regime with some challenging tracking issues.At this point, we believe it is too early to make changes to existing estate plans and are recommending a “wait and see” approach. The Trump Administration has not put forth proposed legislation and we suspect that any estate tax reform will involve significant compromise. The last 20 years have been a bit bumpy in the estate planning world, but 2017 may make that uncertainty pale in comparison. Check back for additional information as it becomes available.

Proposed Rules May Impact Interests in Family Business Entities

The IRS has issued long awaited proposed regulations under Section 2704 of the Internal Revenue Code that would make sweeping changes to the valuation of interests in family business entities for estate, gift, and generation-skipping transfer tax purposes. If they are adopted, the proposed regulations will reduce the availability of certain valuation discounts used in valuing transfers of business interests between family members. Thus, clients considering transfers of interests in family businesses may want to consider implementing those transfers before the regulations are finalized to facilitate more favorable valuations.Under current law, when transfers of interests in family business entities are reported on a gift or estate tax return, the appraised value often reflects minority-interest and lack of marketability discounts, supporting values for estate and gift tax purposes that may be lower than the actual percentage of the interest in the total value of the enterprise. For example, if a family member owned a 20% interest in a family LLC that operated a business, the appraised value would likely be discounted by another 20% to 40% to reflect the minority position transferred and the lack of any market for such business interests, thus reflecting a value less than 20%. In addition, some legal arrangements seek to add restrictions that would limit further the rights of owners in an effort to reduce the value more. The new proposed regulations focus primarily on disregarding these restrictions on liquidation in determining the fair market value of a transferred interest, and by treating the lapse of voting or liquidation rights as an additional transfer.The proposed regulations are in a 90-day comment period, to be followed by a public hearing scheduled for December 1, 2016. It is expected, because these regulations are controversial, that the IRS will receive many comments, and that the final regulations will not be issued until sometime in 2017 at the earliest. We understand that IRS personnel have already commented that the proposed regulations were not intended to eliminate minority and marketability discounts. We will be keeping a close eye on further developments in this area.In general, the regulations would apply to transfers made after the regulations are made final, although they might apply to transfers made before that date if the transferor were to die after the effective date but within three years of the date of the transfer.We believe that for families who have contemplated transfers but have not yet done so, there is still time to act. Clients who are considering transferring interests in family-controlled entities that are not controlling interests and do not have liquidation rights should consider making the transfers soon.

Change in Maine Estate Tax

January 2016 will herald a very important change in the Maine estate tax. The Maine estate tax exemption, now $2 million (the amount that may pass free of estate tax in addition to what may pass to a spouse or charity), will increase to match the level of the federal exemption – this is a dramatic increase! The federal exemption, currently $5.43 million per decedent, is indexed upward annually. Although we do not know what the amount will be in 2016, it should be significantly more than it has ever been. This means that many estates will no longer be subject to the Maine estate tax. As a result, many people can simplify their plans starting in 2016 to omit unneeded tax planning and focus only on the concerns of how assets should be left for survivors without the overlay of tax complexity. The federal estate tax and the Maine estate tax are not identical, however. For individuals and couples with larger estates tax planning is still warranted, as the federal concepts of portability and generation-skipping planning are often not well served by a simple plan for a Maine resident. In addition, trusts will continue to serve an important role for many clients who have incorporated them in their documents for reasons other than pure tax planning. The change in the Maine exemption creates some planning opportunities that may help families who have existing Credit Shelter and Family Trusts left in the plan of a deceased parent or spouse. We will address some of these opportunities more comprehensively in a tax planning alert that we will be sending soon. Should you have questions, please feel free to talk with any of the lawyers at LeBlanc & Young to explore how this change in Maine law might affect you and your estate plan.