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Tax Notes Quotes Beth Kaufman on Changes to Gift and Estate Tax in Recently Proposed Tax Plan

September 20, 2021, Tax Notes

The House Democrats’ plan to revamp the tax treatment of grantor trusts would effectively bring an end to a laundry list of the most widely used estate tax planning techniques, according to practitioners.

. . .

“The fact that a transfer to a grantor trust would no longer remove those assets from the grantor’s estate, or prevent a later gift, strikes at the heart of most of the most popular estate planning techniques,” Beth Shapiro Kaufman of Caplin & Drysdale told Tax Notes.

. . .

Kaufman also noted that while taxpayers would have until the end of this year to use up their remaining gift tax exemptions, unless they intend to make outright gifts, the effective date for most tax planning options could actually be much sooner, thanks to the earlier date of enactment for grantor trusts.

. . .

Kaufman observed that the Ways and Means Committee’s bill raises many questions about just how far-reaching it would be. In the provision to tax sales between a grantor trust and its deemed owner, the effective date portion of the text refers to contributions to trusts made on or after the date of enactment, yet it doesn’t specify what constitutes a contribution, she said.

“Does that mean only a new gift? Would it apply to a swap of assets? A sale for cash? A sale for a note?” Kaufman said.

Kaufman also wasn’t certain how the proposal would apply to trust decantings after the date of enactment and whether a decanted trust would be considered a newly formed trust or a continuation of the trust that was created before enactment. “That is not clear, and it creates risks for decanting of grantor trusts after the effective date,” she said.

. . .

To some practitioners, the grantor trust proposal could reach beyond what the drafters of the provision had in mind.

A standard life insurance trust relies on payments that use up a taxpayer’s annual exclusion amount — $15,000 per donee in 2021 — to fund the insurance premiums. Those annual gifts each year would then be “contributions” to a preexisting grantor trust after the effective date, which in turn would appear to cause some prorated portion of the life insurance proceeds to later be included in the grantor’s estate after her death, Kaufman said.

“I find it hard to imagine that that the draftsmen intended this provision to be that broad,” Kaufman added.

The Ways and Means proposal would also appear to swallow up QTIP trusts, which are often used to provide a source of income for a surviving spouse after the death of the first spouse while also ensuring children from a previous marriage are still cared for. Kaufman further observed that under current law, a taxpayer might set up a lifetime QTIP trust for his spouse, and the assets in that trust would be excluded from his estate but included in the estate of the surviving spouse.

However, under the proposed grantor trust changes, the assets would effectively be included in the estates of both spouses, with no apparent offset, according to Kaufman. As such, no one would bother considering a QTIP trust anymore, she said.

For the full article, please visit Tax Notes’ website (subscription required).

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