The good news and the bad news…..
Last month, a group of U.S. Senators including Elizabeth Warren and Bernie Sanders sent an open letter to Treasury Secretary, Janet Yellin. The subject was how trusts are used by estate planning attorneys to minimize estate and gift taxes.
THE GOOD NEWS is that the Senators acknowledged that GRATS, SLATS and other forms of trusts are being used to transfer vast sums of wealth from one generation to the next with little or no gift or estate tax consequences. They further acknowledged that these trusts fully comply with the Internal Revenue Code.
THE BAD NEWS is that this group of Senators is urging the Treasury Department to reverse long standing positions (in some cases going back almost 40 years) to limit or even eliminate the use of these trusts – effectively circumventing the legislative process which would require that Congress act to change the tax code.
Congress was not successful in issuing legislation proposed by the Obama Administration and sponsored by Senator Van Hollins to reverse current law with regard to these estate planning techniques. Instead, these Senators have requested that the Treasury Department reverse its long-standing position in published revenue rulings, not because of any legislative change in the Code, but merely because these Senators don’t like the result.
The proposed changes would severely limit the techniques available to wealthy individuals to implement estate tax planning methods to transfer wealth to the next generation. One proposal is the elimination of the zeroed out GRAT. A GRAT would be required to have a minimum gift value equal to 25% of the fair market value of the property used to fund the trust.
Another change sought would eliminate the status of irrevocable trusts as “grantor trusts” for income tax purposes. Under current law, the grantor can pay the income tax on the trust’s income as if it were the grantor’s personal income tax liability even though the grantor is not a trust beneficiary. The payment of the trust’s income tax liability is not treated as an additional gift by the grantor. These Senators are urging the Treasury to rescind a revenue ruling which recognizes this tax treatment.
It is one thing for Congress to enact new laws to change the Code using the legislative process. It is quite another thing for the Treasury Department to reverse long-standing settled law to undermine the Code. This latest attempt is not the first time the Biden administration has tried to do an end around to avoid dealing with Congress.
We cannot predict the Administration’s response to this creative attempt to circumvent the legislative process and implement significant and far-reaching tax reform. If you are concerned with how these proposed gift and estate tax could impact your estate plan, then you should contact our office at 908.273.5730 to discuss what steps you should take to protect your estate.
Ken Cohen, Partner at Avelino Law, LLP is recognized for his expertise in asset protection, tax litigation, business law, and estate planning and administration. Ken can be reached by calling 908.273.5730 or by email at firstname.lastname@example.org