Property taxes could trap trusts favored by the rich

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Two current tax proposals target key points in the estate plans of most high net worth clients. One is making the headlines, but the other should get more attention.

The first focuses on whether a taxpayer who uses his federal exemption of $ 11.7 million from gift and inheritance tax this year can keep that amount if he dies after that exemption has fallen. to pre-2017 levels. This drop could occur either through a bill soon or in 2026, the sunset year under the Tax Cuts and Jobs Act.

“Earlier regulations issued by the Treasury protected taxpayers from such clawbacks, but the Treasury reserved the right to issue additional guidance regarding certain gift transactions considered abusive. It appears the Treasury is now looking to issue such additional guidance, ”said Tara Thompson Popernik, research director at Bernstein Private Wealth Management in New York.

The IRS said there would be no clawback but has not closed the door to the possibility. Still, “the effect of a potential recovery should be quite limited,” said Neil V. Carbone, a partner at Farrell Fritz, PC, in New York.

“Many of our clients are aware of the potential changes in the amount of the federal exemption,” Popernik said, “but fewer are aware of the potential impact of changes to the settlor’s trust rules.”

The second question is whether the transferor trust status, which currently only relates to the tax treatment of a trust, will be broadened to also affect the treatment of inheritance tax. “As many trusts created today are structured as transferor trusts, this change has the potential to have a significant impact,” said Popernik.

This proposed law would affect trusts created from the date of enactment, but could also apply to contributions to an existing trust made on or after that date, said Karen L. Goldberg, senior manager of the Trusts and Estates. at EisnerAmper in New York.

The proposed rules for intentionally defective transferor trusts, which include treating distributions as gifts, “do more than shut down life insurance trusts,” Goldberg said. Grantor-retained annuity trusts will no longer be viable because “even if they are successful, any Libres property remaining at the end of the trust will be subject to gift tax.” Sales to faulty grantor trusts won’t work either … because the trust [can be included] in the estate of the transferor, ”she said, adding that spouse’s lifetime access trusts could also be affected.

“Some estate planning attorneys believe Congress has failed to consider all of the unintended consequences of these arrangements,” said Chuck Zuzak, director of financial planning in the Pittsburgh office of JFS Wealth Advisors of Hermitage, Pennsylvania.

Time is running out, but planning is still possible.

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