We encourage you to consult with your attorney or financial adviser before taking any of these steps to tailor any planning to your specific circumstances.
As an update to our September 24, 2021, Alert on the Build Back Better Act, this Alert highlights certain common estate planning techniques that may be subject to adverse tax consequences if Congress enacts the bill in its current form. As of the publication of this Alert, Congress is entertaining further tax proposals, including the “billionaires tax.” Thus far, however, the new proposals have not included any adjustments to the existing provisions of the Build Back Better Act discussed here.
Below, we suggest some possible steps that can be taken now to deal with certain changes proposed to take effect immediately if the Build Back Better Act is enacted. Of course, the timing of any action by Congress is uncertain, but many commentators believe that enactment could occur quickly. We encourage you to consult with your attorney or financial adviser before taking any of these steps to tailor any planning to your specific circumstances.
Life Insurance Trusts
If you established a life insurance trust and pay premiums each year from assets not currently in the trust, the proposed bill, if enacted, almost certainly would cause adverse tax consequences both to subsequent transfers to the trust and upon the insured’s death. While a carveout for insurance trusts is anticipated by some commentators, several steps could be taken now to avoid these consequences if the law is enacted in its proposed form.
- If feasible, before enactment, deposit a sum of cash into the trust account sufficient to cover all of the remaining premiums of the policy. If the trust does not have a bank account, the trustee will need open one in the name of the trust. This will work best with term life policies, especially policies with few years remaining until the end of the term.
- Ask the carrier about converting the policy to a paid-up policy and, if desirable, convert the policy.
- Consider having the trustee distribute the policy to one or more descendants of the settlor. This would involve filing change of ownership and beneficiary forms with the carrier.
If the law is enacted too quickly for any of these ideas to be implemented, another alternative would be for the settlor or possibly another family member to lend money to the trust in future years, as provided under Treasury regulations.
Sales to Intentionally Defective Grantor Trusts (IDGT)
If you previously sold property to an IDGT in exchange for a promissory note from the trust and the note remains outstanding, there may be adverse tax consequences upon payment of the note following enactment of the pending bill. There is a consensus among practitioners that payment in kind (as opposed to in cash) is likely to be a gain realization event following enactment of the law. There is less consensus about payment in cash following enactment of the law. To avoid this uncertainty, consider having the trust pay off the entire outstanding balance prior to enactment, in cash or in kind.
Grantor Retained Annuity Trusts (GRAT)
If you have a GRAT with an unexpired annuity term and it lacks sufficient cash to pay the annuity, future payment of the annuity in kind likely will be a gain realization event if the proposed bill is enacted into law. If feasible, consider swapping the GRAT’s illiquid asset for cash or marketable securities prior to enactment. If you do not have sufficient funds, consider the use of a margin loan or a bank line of credit.
Spousal Lifetime Access Trusts (SLAT)
A SLAT is a “grantor” trust that is designed primarily to take advantage of the current gift tax exemption ($11.7 million per taxpayer). Although the proposed reduction in the exemption (to approximately $6 million per taxpayer) is slated to take effect on January 1, 2022, transfers to a grantor trust after the date of enactment will cause a portion of the trust to be taxed in the client’s estate, among other adverse income tax consequences. As a result, the deadline for creating and funding a SLAT is not December 31 but rather the date of enactment, which could be much earlier.
This is a partial list of ideas that may be beneficial in your planning. Other ideas may become feasible as more information is known about the final bill.
About Duane Morris
Attorneys in our Private Client Services Practice Group provide estates, trusts, asset planning and related litigation services to individuals, business owners, charitable organizations and fiduciaries. They work to minimize tax exposure and implement creative strategies to preserve capital and transfer resources within the client's family and to next generations.
For More Information
If you have any questions about this Alert and would like more information about this topic or your own unique situation, please contact any of the attorneys in the Private Client Services Practice Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.