Lifetime ‘QTIPable’ Trusts for Reward, Property Tax Exemption Planning

With the change in political control in Washington, what changes are on the horizon and what estate tax planning should be done early in 2021 for those high net worth individuals who have not used all of their available exemption? The 2017 TCJA doubled the amount of the federal gift and estate tax exemption. For 2021 the exemption is $11.7 million per taxpayer. Absent any sooner change, the 2017 law will “sunset” at the end of 2025 and the exemption will revert back to the pre-2017 level of $5 million (adjusted annually for inflation).

Currently, although the Biden administration tax proposal includes a reduction in the estate tax exemption, it has not prioritized any tax law changes that would reduce the exemption to the pre-2017 level, or even a lower number. Such targeted legislation affecting income and estate and gift tax rates could be passed later this year, at the earliest, and is unlikely to be made retroactive to Jan. 1, 2021. As of this writing, the legislative focus is on a pandemic relief package and other pressing economic issues.

The uncertainty of when the exemption may be reduced makes flexibility in planning techniques very attractive. In this vein, the estate planning options discussed in our 2020 Federal Gift and Estate Tax Planning Alerts last October 2020 (Parts I and II) suggest an additional 2021 planning option for married couples who have available exemption. The basic concept is for one spouse to create and fund a trust for the benefit of the other spouse (a SLAT) for which the decision to treat it as a taxable gift that uses exemption or as a gift protected from tax by the marital deduction can be deferred until October 2022. This can be done using a so-called “QTIPable” trust structured according to the federal tax law and regulations that is eligible to qualify for the marital deduction from gift /estate tax. The word “eligible” is what provides flexibility because the election to determine whether the trust will use the grantor’s exemption or not will be made on the grantor’s 2021 gift tax return, due (on extension) Oct. 15, 2022.