Estate Planning Under Trump – Estate planning is the process of arranging your affairs to minimize taxes, protect your assets, and provide for your loved ones after your death. Estate planning can be complex and challenging, especially under changing tax laws and political uncertainty.
In this article, we will explore some of the key aspects of estate planning under the Trump administration, and how you can take advantage of the current opportunities before they expire or change.
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The Trump Tax Act and Its Impact on Estate Planning
The Trump Tax Act, officially known as the Tax Cuts and Jobs Act (TCJA), was enacted in 2017 and brought significant changes to the federal estate and gift tax system. The TCJA doubled the lifetime exemption amount for both estate and gift taxes from $5 million to $10 million, adjusted for inflation. This means that in 2021, an individual can transfer up to $11.7 million of assets during life or at death without paying any federal estate or gift tax. A married couple can transfer up to $23.4 million of assets without any federal tax liability.
The TCJA also preserved the portability feature of the estate tax exemption, which allows a surviving spouse to use any unused exemption amount of the deceased spouse, as long as an estate tax return is filed to claim it. This effectively allows a married couple to use the full $23.4 million exemption without having to set up complex trusts or other planning strategies.
The TCJA also maintained the step-up in basis rule for inherited assets, which means that the heirs of a decedent receive a new income tax basis equal to the fair market value of the assets as of the date of death. This step-up in basis eliminates any capital gains tax on the appreciation of the assets during the decedent’s lifetime and allows the heirs to sell the assets without paying any income tax, or defer the tax until they sell them in the future.
However, these favorable provisions of the TCJA are not permanent. They are scheduled to expire on December 31, 2025, unless Congress extends them or enacts new legislation. If they expire, the estate and gift tax exemption amount will revert back to $5 million (adjusted for inflation), and the estate and gift tax rate will increase from 40% to 45%. Moreover, there is a possibility that Congress may act sooner than 2025 to reduce the exemption amount or increase the tax rate, given the government’s need to raise revenue to fund pandemic relief and other spending programs. For example, President Biden has proposed to lower the exemption amount to $3.5 million for estate tax and $1 million for gift tax and to eliminate the step-up in basis rule for inherited assets.
Therefore, it is important for high-net-worth individuals and families to take advantage of the current opportunities before they are gone or changed. Here are some estate planning strategies that you may want to consider:
Estate Planning Strategies Under Trump
Make large lifetime gifts
One of the most effective ways to reduce your taxable estate is to make large gifts during your lifetime, using your $11.7 million exemption amount. By doing so, you can transfer wealth to your beneficiaries without paying any gift tax, and also remove any future appreciation of the gifted assets from your estate. You can make outright gifts or gifts in trust, depending on your goals and preferences. For example, you can create a spousal lifetime access trust (SLAT) that allows you to make a gift to a trust for the benefit of your spouse (and possibly other beneficiaries) while retaining some access to the trust assets through your spouse if needed. You can also create a grantor-retained annuity trust (GRAT) that allows you to transfer future appreciation of an asset to a trust for your beneficiaries while retaining an annuity payment for a fixed term. If you survive the term and the asset appreciates more than a certain interest rate (called the Section 7520 rate), you can transfer the excess value to your beneficiaries free of gift tax.
Use low-interest rates
Another way to leverage your exemption amount is to use low-interest rates to make intra-family loans or sales. You can lend or sell assets to your family members or trusts at a low-interest rate (based on the applicable federal rate or AFR), and if the assets generate a higher return than the interest rate, you can transfer that excess value to your beneficiaries free of gift tax. For example, you can sell an asset to an intentionally defective grantor trust (IDGT) that is disregarded for income tax purposes but respected for estate and gift tax purposes. You can receive a promissory note from the trust that pays you interest at the AFR while retaining the income tax liability on the trust assets. If the trust assets appreciate more than the AFR, you can transfer that excess value to the trust beneficiaries free of gift tax. Alternatively, you can lend money to your family members or trusts at a low interest rate, and allow them to invest the money in higher-yielding assets. If they repay the loan with interest, you can transfer the difference between the interest rate and the investment return to them free of gift tax.
Create charitable trusts
If you are charitably inclined, you can also use charitable trusts to reduce your taxable estate and benefit your favorite causes. For example, you can create a charitable lead annuity trust (CLAT) that pays a fixed amount to a charity for a certain term and then distributes the remaining trust assets to your beneficiaries. By doing so, you can reduce the value of the gift to your beneficiaries for gift tax purposes and also support a charitable cause during the term. Alternatively, you can create a charitable remainder trust (CRT) that pays a fixed or variable amount to you or your beneficiaries for a certain term or for life and then distributes the remaining trust assets to a charity. By doing so, you can receive an income stream from the trust, defer or avoid capital gains tax on the sale of appreciated assets, and also receive an income tax deduction for the value of the remainder interest that goes to charity.
In conclusion, Estate planning under the Trump administration can be a rewarding but challenging endeavor. The TCJA provides a unique opportunity to transfer significant wealth to your beneficiaries without paying any federal estate or gift tax, but it also comes with uncertainties and complexities that need to be carefully addressed. Moreover, the TCJA is not permanent, and it may change or expire in the near future, depending on the political and economic landscape. Therefore, it is crucial to consult with an experienced estate planning attorney who can help you navigate the current and potential future tax laws, and design an estate plan that meets your goals and protects your legacy.