Major Changes to Estate Planning

At this moment we are sandwiched between two significant events affecting any estate plan that seeks to minimize taxes (of all kinds) to the next generation. What are these two events, and how does it impact the charitable giving world?

First, what are these two major events? The first is an IRS Revenue ruling that you probably didn't notice. Almost exactly 1 year ago, Rev. Rul. 2302 altered what is considered the Holy Grail of tax-avoidance- the "Step Up in Basis". There are certain types of irrevocable trusts that have been established as Grantor trusts where the creator of the trust, aka the Grantor, is still liable to pay the income taxes on the trust annually. These "intentionally defective" trusts do not create a separate taxable entity but do remove assets placed in the trust from the grantor's estate and that, my friends, is the heart of the matter. Assets removed from the estate of the grantor are not subject to the stipulations that qualify a transfer of those assets to fall under Sec 1014 and thus receive a step-up in basis to the beneficiary of the trust.

Gobbledygook, right? What does this mean for me, or my donors/clients, you ask? Well, here it is plainly- one of the most popular estate planning tools wealthy people use intending to pass appreciating assets to their heirs has been dealt a serious blow. They can still pass on appreciating assets and remove them from their estate, but the heirs receive those assets with a carry-forward cost basis, essentially punting the capital gain tax liability on to the next generation. "Thanks a lot, Mom and Dad!" More on this in a second...

The second major event to bookend this conversation? The sunset of the Unified Credit levels currently in place. The extraordinarily high unified credit for estate taxes is set to sunset (expire) on Dec 21, 2025 without action from Congress. The last time everyone assumed Congress would act on lapsing estate tax rules was 2009 and no one expected Congress to let the estate tax lapse, but they did, and it led to one of the strangest estate tax situations in history in 2010 when there was no federal estate tax. If the current levels sunset without action, the unified credit would drop by half, to approximately $7M per person.

Let's combine these two events- a reduction in one's ability to avoid the realization of capital gain and a 50% reduction in the estate tax exemption threshold. Giving While Living is about to have its heyday (IMO).

Talking to the people with whom you work about these changes can only serve to bolster your credibility and give them some time to consider how to manage assets and their broader estate plans. Lifetime gifts to living heirs as well as charitable gifts are the best ways to minimize payments to Uncle Sam. Living or Testamentary charitable trusts are excellent vehicles to consider. People wishing to support their living heirs and their charitable interests now have more reason than they need to consider creative solutions marrying these interests but many never will without specific guidance from philanthropic advisors like me and you. Get out there and preach!

PS- Sorry for the long delay since the last article. I'll try to do better keeping up the frequency!!

Jason