Under current law, the first $11,700,000 of assets at the time of death will escape taxation because of a corresponding Federal tax exclusion in the same amount. Any exclusion amounts not used, can be carried over to a surviving spouse. There appears to be heavy pressure from Congress to reduce this exemption to five to six million or over a 50% reduction in the amount that will escape a 40% estate tax.
The second major consideration is to significantly change the way capital gain taxes are assessed with even the possibility this tax will be assessed at death and not at the time of a subsequent sale. Currently, a low- cost basis asset will be stepped up to the fair market value at death meaning the beneficiary will have little or no exposure to capital gains taxes depending on when the asset is sold. Additionally, it is being proposed that the capital gains rate of taxation will be increased from the current three tier tax rate (0/15%/20%) depending on taxable income. These taxes could now be based on the tax rate of ordinary income which could be as high as 37%.
Not knowing all the particulars other than change will occur with the new administration, there are some planning opportunities to reduce or possibly eliminate this exposure, two of what will be highlighted.
Property held outside the estate where control is given to a trustee, will escape taxation at death with the only issue that some costs may be incurred at the time of transfer. If an individual sets up an irrevocable trust, that trust can purchase property from the estate using a promissory note. The 2021 IRS interest rate on those notes for less than a 10-year duration are just a little over 1%. Once the property is transferred, the trust then has the income and appreciation which can then be used to pay the interest and the ultimate original loan amount using appreciated assets (asset growth in trust in excess of interest payments).
In this trust arrangement, no taxes will be associated with the sale to the trust as under specific trust provisions, the sale will be treated as a sale to the grantor. Under this grantor provision, all income tax advantages will pass to the grantor even though the asset is outside of his or her taxable estate.
Finally, with the grantor trust as described, cash flow from the income generated by trust assets can be used to purchase life insurance, again, outside of estate taxation. With proper drafting, a non-trust beneficiary can be given a special power of appointment that can then be used to withdraw cash values in behalf of the grantor without impacting the estate tax exclusion issues. When you create this leverage and compare it to keeping an asset in the estate with all the issues of appreciation and the resulting estate tax, this can be a significant tool.
The second planning issue is an income tax issue that can be especially attractive if capital gain taxes increase. Instead of paying a lump sum capital gain tax at a higher income tax rate, consider gifting the asset to a charitable remainder trust where not only a charitable gift can be secured based on a remainder interest, but lifetime cash flow income can be secured with capital gain taxes spread out over a respective lifetime(s). The gift itself is the actual fair market value of the property and not the after- tax value if the property were sold. As with the irrevocable trust as previously described, these enhanced cash flows can then be used to secure life insurance in the amount that might have been passed to the beneficiary absent the charitable gift.
For questions and/or applicability of these potential planning techniques, seek out an estate planning attorney or an allied professional who is an Accredited Estate Planner (AEP) as designated by the National Association of Estate Planners.