Currently, U.S. citizens and non-U.S. citizens domiciled in the U.S are entitled to an $11.7 million gift and estate tax exemption and are subject to a maximum marginal gift and estate tax rate of 40%. While the gift and estate tax exemption is scheduled to drop to approximately one-half the current amount on January 1, 2026, there are tax proposals in play that could change the estate and gift tax laws much sooner.

President Biden has expressed a desire to reduce the gift and estate tax exemption from $11.7 million to $3.5 million and increase the gift and estate tax rate from 40% to 45%. The Treasury Department’s recently released “Green Book” reveals that the Biden Administration is also proposing to increase the types of transfers that would trigger capital gains for income tax purposes. The expanded category of transfers would include gifts, property transferred at death, transfers to or distributions from trusts, as well as contributions to or distributions from partnerships.

These types of transfers are largely used currently for estate planning, and the proposals along with additional bills in Congress would substantially change today’s estate planning environment. Given the uncertainty of the new tax legislation, consideration may be given to the following wealth transfer strategies:

  • Annual Gifts You can currently make an annual tax–free gift of $15,000 per individual (indexed for inflation) that does not count against your lifetime gift tax exemption. Any amount you give annually above $15,000 counts toward your lifetime gift tax exemption. If you are able, consider giving gifts sooner than later to help keep future appreciation out of your estate.
  • Spousal Lifetime Access Trust (SLAT) A SLAT is an irrevocable trust created by you for the benefit of your spouse, however, the trust terms can also be drafted to provide benefits for your beneficiaries during your spouse’s lifetime. A SLAT is designed so that assets gifted or sold to the trust will not be includible as part of either your or your spouse’s estate for federal estate tax purposes. Because the assets in the trust will not be taxable at death, the total assets passing to your beneficiaries can be greater assuming the assets appreciate.
  • Grantor Retained Annuity Trust (GRAT) Given the historically low-interest rates, a GRAT can be particularly beneficial in this type of environment. A GRAT is an irrevocable trust that you create and fund with assets that are expected to appreciate over time. You retain the right to receive an annuity from the GRAT for a term of years, which is computed by applying the IRS rate of return to the value of the assets transferred to the GRAT. At the end of the GRAT term, the trust’s remaining assets will pass to your beneficiaries. If the contributed property appreciates or produces income that outpaces the IRS rate of return, that growth or appreciation will pass to those beneficiaries transfer tax-free.
  • Charitable Lead Annuity Trust (CLAT) If you have charitable inclinations, you may want to consider a CLAT, which is favorable under the current conditions for similar reasons as described above with respect to a GRAT. A CLAT is an irrevocable trust funded with assets that are expected to appreciate over time. A qualified charity receives an annuity from the CLAT for a term of years, which is determined by applying the applicable IRS rate of return to the value of the assets transferred to the CLAT. In addition, you receive an immediate income tax charitable deduction equal to the calculated value of the annuity payments. At the end of the CLAT term, the remaining assets will pass to your beneficiaries. If the contributed property appreciates at a rate that outpaces the applicable IRS rate of return, that growth or appreciation can pass to those beneficiaries transfer tax-free.
  • Preserve Insurability Life insurance MAY be purchased with the intent of using it to pay estate taxes because the death benefits pass income tax-free. To prepare for the potential of increased estate and capital gain taxation, you may consider acquiring convertible term insurance. If the proposed legislation passes, you are then able to convert the term insurance to permanent coverage without additional health underwriting, preserving your insurability and flexibility to pay any estate taxes.

These are just a few potential strategies to consider depending on your financial circumstances.  Although there are still many unknowns, it is important to plan and evaluate your options. If you have questions regarding estate planning opportunities and the proposed tax law changes, please reach out to your Atlas Wealth Management Advisor.

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