Ask anyone outside the US what they think of when they think of an American New Year celebration, and chances are they will mention the ball drop in New York's Times Square.
That's all well and good, but let me ask, does the Empire State have a New Years Possum drop? How about a buzzard drop? Maybe a geranium drop? None of that you say Hmm
Now, in which states are residents lucky enough to raise "a cup of kindness" (i) while counting down the minutes to the New Year by watching a marsupial, bird of prey, and flower sink? Only in one do you say
Right. Only Georgia can boast that these three unique "drop" events take place here. (Ii)
So is it no wonder that the political fate of the nation for at least the next two years (iii) will be decided tomorrow, January 5th, by the voters of the peach state?
By New Years Day, the last day for the early vote in the runoff elections for Georgia's two seats in the US Senate, over 3 million votes had already been cast. To put this number in perspective: the Perdue-Ossoff competition in November 2020 received a total of over 4.8 million votes, and the Warnock-Loeffler race almost 2.9 million. (iv)
In November and December 2020 – a period of less than two months – roughly half a billion dollars flowed into the campaigns of these four candidates. (V)
We all know why so much effort goes into the Georgia runoff. To date, the Republican Party has 50 seats in the Senate, while the Democrats have 48 seats.
If Republicans take just one of the two controversial seats, they will control the Senate and, if they adopt a strict party-political vote – not a matter of course on the Republican side at least – they will be able to impede almost any proposed tax bill that lasts at least two years long from a White House in Biden. (vi)
If the Democrats take both seats in the Georgia Senate, that chamber will be split evenly. In the event of a tie on a tax law – which means a party-political vote – the elected Vice President Harris can cast the decisive vote as President of the Senate.
Let's say the Democrats have both seats in the Georgia Senate. Let us also assume that they do not abolish the filibuster (vii) (“reform by decision”, better known as the “nuclear option”), which would require the approval of every Democrat in the Senate, and opt against reconciliation. viii)
What does this mean for estate tax planning for the owner of a closely managed company over the next two years? (Ix)
The first points to consider include what can be described as the proverbial low-hanging fruit as it is supposed to be fading from the law. Others may be reachable under the give and take (or sausage making if you prefer) which is the legislative process. Still others are unlikely to be addressed (except in select circles) for fear of alienating voters ahead of the 2022 elections.
What is probable
It is more than likely that the Democrats will reduce the flat tax exemption amount for estate, gift, and GST taxes to the level that those exemption amounts would have been set this year had the Tax Reductions and Jobs Act (x) from 2017 would not have doubled the basic exclusion amount for the tax years 2018 to 2025; (xi) In other words, we can expect an acceleration (by five years) on the existing schedule, according to which these changes would otherwise have occurred in 2026. (xii)
It is also likely that the so-called "portability" rule, under which the amount of unused exemption ("DSUE") of a deceased spouse is transferred to their surviving spouse, will remain intact.
In addition, the reduction in the amount of exemption is unlikely to be applied in a way that retrospectively denies some future estates the full benefit of the higher amount of exemption that may have been in effect at the time of a deceased's taxable gifts (xiii)) for example those made in late 2020 were.
The reduction in the exemption amount can be accompanied by an increase in the top tax rate for the federal estate / gift / GST tax from 40 to 45 percent.
Speaking of tax rates – and while this is not part of the estate tax system, it is closely tied to it – it is reasonable to expect the Democrats to raise the highest tax rate applicable to long-term capital gains (xiv) and qualified dividends (xv) below Assuming that the Supreme Court does not take down ACA (xvi), the 3.8 percent surcharge on net investment income (xvii) would continue to apply as under current law. This would increase the maximum capital gain and dividend tax rate including ancillary tax to 28 percent.
These characters were not picked out of nowhere; For example, the 24.2 percent rate for capital gains was included in President Obama's 2017 budget. (xviii) Indeed, much of the tax plan presented by Mr Biden during the presidential campaign was derived from this proposed budget. It also appears that most of the people who were nominated or appointed by Mr. Biden to his administration were once members of the Obama administration. Reasonable conclusions can be drawn based on the above.
What is unlikely?
However, it is unlikely that the Democrats will attempt or attempt to remove the base adjustment (usually a "top-up") for assets acquired after the death of the deceased or transferred from a deceased person (xix) Treat the death of a deceased as an event of recognition that results in the imposition of income tax on the built-in gain (i.e. untaxed increase in value) of a deceased's property as if that property had been sold at fair value at the time of death (xx)
Given the decrease in the number of seats held by the Democrats in the House of Representatives (from 235 to 222) (xxi) and an even split in the Senate at best, it would be a deception for the party to believe – and misleading to state that it is the mandate has to remove the basic step-up rule or treat death as a qualifying event for income tax purposes. While some of the party's more "radical" thinkers – almost entirely in the House of Representatives – are most likely to seek these changes, they are blamed by many Democrats for what, under the circumstances, has been described as the party's relatively poor performance last November.
In addition, the political and theoretical foundations for such significant changes have not yet been laid. Campaign slogans such as “taxing the rich” – whatever that means – may resonate with some voters but do not provide a basis for any meaningful and effective legislation.
For example, the long-term base adjustment rule is based on the rationale that the death of a deceased corresponds to the sale of the deceased's assets to their beneficiaries at fair market value with no income tax consequences. (Xxii) It will likely take many years to convince the target audience (xxiii) – or the legislators they support – of the tax or other need to abandon this principle, let alone introduce an income tax on the assets of a deceased, if there is no actual sale or exchange of the deceased's property.
In other words, don't expect the 117th Congress, officially convened yesterday, to break new ground.
Yesterday's re-election of Ms. Pelosi as House Speaker, given her ideological leanings, may not be a good sign for Democrats in the long run, but stranger things have happened. In other words, despite this development, Democrats may still be able to make additional changes to the federal estate and gift tax system in two years' time, including, for example, further reducing the amount of the exemption and possibly eliminating certain planning techniques or vehicles.
Given this possibility, those taxpayers who acted prior to the end of 2020 to give gifts in a total amount equal to or close to their remaining flat amount for estate / gift tax exemption may consider they are theirs Ability to further reduce their otherwise taxable tax exhausted from their estate.
To some extent, in these circumstances, it will be more difficult to reduce one's future wealth without incurring a gift tax debt. (Xxiv) However, there are still a number of tools that can be used to reduce, freeze, or control your estate.
Annual donation
The annual exclusion gift remains firmly anchored in the Code: (xxv) At $ 15,000, a couple can give non-taxable gifts (cash or in kind) each year with a fair market value of $ 30,000 for each expense.
If the gift is in kind, that is, minority and / or non-voting interests in a related company, the ability to discount the value of those interests will leverage the annual lockout amount. (xxvi)
Low Interest Loans
Assuming that the low interest rate environment we are in now continues, taxpayers can take various steps to effectively freeze the value of part of their estate by "converting" those assets into the capital of a below-market interest rate Loans, and shift the future appreciation of those assets (or the assets acquired with the proceeds of the loan) to their issue. (xxvii)
Intra-family loans. A taxpayer with cash and cash equivalents may consider making a soft loan for their issue or for companies that own their issue. Although interest must be paid (and other signs of indebtedness must be present) to aid in the tax treatment of the loan as such, the younger generation's investment in the loan proceeds can produce a return well above the low level of the loan payable Interest.
Sold to Grantor Trust. In general, a “grantor trust” is a trust in which the grantor has “retained” certain rights so that the grantor will continue to be treated as the “owner” of the trust's property and income for tax purposes. (Xxviii)
Many of the gifts given in 2020 involved the use of Grantor Trusts. There were several reasons for this: (i) The grantor wanted to take advantage of its exemption by being liable for the income taxes on the gifted assets (see below). (ii) the founder wanted to be able to repurchase the gifted property from the trust if future circumstances warranted such a transaction; and (iii) the grantor wanted to use part of its exemption but was unable to obtain a valuation before the end of the year – it presented the trust with liquid or marketable assets of a value equal to the exemption with the intention of exchanging them for the property they actually own wanted to give away as soon as this property was valued in early 2021.
The same trusts can now be used to purchase other assets from the grantor (which have the potential to appreciate) in exchange for a term bond (xxix) that bears interest at the applicable federal interest rate (xxx), which is payable and compounded annually, with a Balloon payment when due. Due to the trust's escrow status, the sale is ignored for income tax purposes, as is interest payments (xxxi) for gift tax purposes. However, the grantor will be treated as appropriately considered. In addition, the founder will continue to be taxed on any income or profits recorded by the trust, further reducing his estate and effectively giving the trust recipients a tax-free gift.
RIDGE. A variant of the sale to a trust is the legally blessed GRAT or "Grantor Retained Annuity Trust". Even in a low interest rate environment, it works well, meaning that the GRAT is considered successful if its assets are upgraded at a rate that exceeds the discount rate used in determining the present value of the annuity. (Xxxii)
The grantor would set up and fund a trust to receive a "fixed" amount to be paid to the grantor at least annually over a period of years. (Xxxiii) Since the trust is usually a grantor trust, it has the same advantages described above (for example, the annuity payment is not taxable for the grantor).
The amount of the gift given by the founder corresponds to the market value of the assets transferred to the trust above the present value of the withheld pension interest of the founder. The longer the term or the higher the pension amount, the lower the amount of the gift. Indeed, under applicable law, it may be possible to enter into a GRAT arrangement with very little gift tax risk. (Xxxiv)
As with annual gifts (as described above), an in-kind of stake in a company, particularly a company organized as a non-taxable company or a transit company, can be used to take advantage of a sale to a Grantor Trust or a Grantor Trust RIDGE.
"Corporate" transactions
In the appropriate circumstances, certain transactions can be used to shift valuable assets to a younger generation of owners. For example, if a business entity such as a corporation or LLC, which is treated as a partnership for tax purposes, operates in two or more divisions, it may be possible to separate the divisions for tax purposes by distributing the faster growing line to the younger generation with which the younger generation is often more concerned with. (xxxv)
Alternatively, a parent-owner can reduce the owner's interest in the business – for example by partially withdrawing or liquidating his stake in it – so that the owner is no longer able to control such a business or block actions by other family members, are the owners, which allows the value of the owner's interests to be discounted for inheritance tax purposes. (xxxvi)
Life insurance
Of course, not every business owner will be able to use these strategies, and many simply will not want to.
In this case, the owner can ensure that his estate is able to benefit from the rules for paying estate tax rates set out in section 6166 of the Code. (Xxxvii)
Alternatively, or even in conjunction with this, the owner – or rather an irrevocable grantor trust in which the owner has no interest – should consider taking out life insurance for the life of the owner (or for the life of the owner and his spouse together, depending after completing on their estate plan) to provide a source of liquidity from which their estate tax liability can be covered. (xxxviii)
Unfortunately for business owners, Mr. Biden is beginning to realize that he may not be able to pass laws that would implement most of his tax agenda. News organizations have begun to report that the president-elect is likely to broaden his focus on regulatory changes, which will lead to an increase in estate and gift taxes.
In particular, it is expected that the 2016 proposed changes to the regulatory valuation rules for the transfer of shares in a closely held company, which were later withdrawn by Mr. Trump, are expected to be reintroduced. As originally designed, these were definitely overseas – for example, treating investment firms the same as operating companies – but were otherwise appropriately targeted at some clearly abusive situations. (Xxxix)
Ask yourself what other transfer tax regulation projects the administration may be considering for the Treasury Department and the IRS.
For example, will the IRS increase the number of gift tax audits? (Xl) Will the income tax audit function work more closely with their brothers on transfer tax? In any case, they should – but will funding for such activities come soon?
Other notable inheritance tax reform options, none of which are likely to be passed in the presently constituted Congress – but which are likely to deserve serious consideration regardless of political affiliation – include the following: (i) Requiring a minimum term for a GRAT increase mortality risk); (ii) requirement of a minimum value for the remaining interest (the gift, which eliminates zeroed GRAT) at the time the property is contributed to the GRAT; (iii) Eliminate (at least in part) the inconsistent treatment of transactions with irrevocable grantor trusts for income tax and estate / gift tax purposes (think of sales to grantor trusts); and (iv) limit the use of dynasty trusts – for example, by increasing the inclusion ratio of the trust to one after a certain number of years (making future trust distributions subject to GST tax).
Taxpayers and their advisors should be prepared for such proposals to be introduced, which I believe is inevitable, and timing their use of the targeted planning vehicles accordingly – they won't last forever.
(i) According to a WSJ piece, the original cup of kindness that “Auld Lang Syne” refers to is whiskey (no “e” in Scottish). https://www.wsj.com/articles/whiskey-is-the-original-cup-of-kindness-11577469857. Still, I have to agree with Tom T. Hall that beer is number 1, but whiskey (although “rough”) shares second place with ouzo. Wine does not make it into the top 5.
(ii) Contrary to my references to Staten Island, I'm joking here. The first great educator in my life was a Waycross elementary school social science teacher who somehow found her in the Bronx. Of the presidents who served in my lifetime, one of the few whom I admire as individuals is a Georgian, Mr. Carter.
(iii) The 2022 national elections may be crucial as the entire House will be back in office, as will 34 "Class Three" Senate seats (made up of 20 Republicans and 13 Democrats – one of the runoff seats in Georgia will be the 34th be.)
(iv) None of the candidates managed to win a majority of the votes cast, as Georgian law requires to win an election. hence the drains.
The Perdue seat has a regular six-year term. Loeffler was appointed by Georgian Governor Kemp to succeed Senator Johnny Isakson, whose regular term would have ended in 2022.
Under Georgian law, after being appointed (November 2020), Loeffler had to run for the next national election cycle to receive the right to serve the remaining two years of Mr Isakson's six-year term.
(v) Much of this money comes from outside Georgia. Just think about how much good this money could have done if it had been spent on those in need – like the people waiting for stimulus checks – instead of letting two people (some of them wealthy) gain positions of power, from which it may proceed the interests of some while writing it down condescendingly of others.
We need to "reform" campaign funding.
These remedies have often been accompanied by people outside of the state who pretended to tell Georgians what is good for them. Can you imagine a New York politician moving to New Jersey to convince that state's voters to support the election of a specific person who New Yorkers believe will best serve New Jersey's interests can?
First of all, every state has to trust that every other state is acting responsibly – by which I mean the sum of its inhabitants as opposed to the legal person – that is the only way this will work. Second, how presumptuous is it for an actor from, say, California to make a cameo in Georgia to educate Georgians about the pros and cons of the candidates they voted on two months earlier? Seriously.
(vi) As previously mentioned, one of those seats – the Warnock-Loeffler Race – is a Class Three seat that is eligible for re-election in November 2022.
(vii) The 60 votes required to end the debate on any matter – including a tax matter – and put it to a vote. At this point only a majority is required to pass.
(viii) The voting budget process allows a simple majority to pass certain bills.
Since expenditure and revenue actions are almost always included in a single invoice, reconciliation can only be used once per budget cycle. As explained by the Center for Budget Policies and Priorities:
"According to the Senate's interpretations of the Congressional Budget Act, the Senate can consider the three fundamental themes of reconciliation – expenditure, income, and debt limit – in a single bill or in multiple bills, but each of these three in only one bill per year (unless , Congress passes a second budget decision). As a result, there can be a maximum of three reconciliation invoices per year in the Senate, one for each of the basic themes of reconciliation.
This rule is most important when the first reconciliation bill the Senate takes affects both spending and revenue. Even if this invoice is mainly devoted to just one of these topics, no subsequent reconciliation invoice can influence income or expenditure, as the first invoice already addressed you. "
https://www.cbpp.org/research/federal-budget/introduction-to-budget-reconciliation.
(ix) The mid-term elections can negate anything that follows, as well as the departure of the 78-year-old elected president for any reason.
A summary of Mr. Biden's tax proposals can be found at: https://www.taxlawforchb.com/2020/08/bidens-tax-proposals-for-capital-gain-like-kind-exchanges-basis-step-up-the – Estate tax-hard-times-ahead /; https://www.taxlawforchb.com/2020/08/responding-to-the-democracy-partys-tax-plans/; https://www.taxlawforchb.com/2020/11/the-2020-elections-are-almost-over-what-now/
(x) P.L. 115-97; the "TCJA".
(xi) IRC Sec. 2010 (c) (3).
(xii) Mr. Biden has discussed the restoration of the $ 3.5 million inheritance tax and $ 1.0 million gift tax exemptions in 2009. Although he may come back to this during the second session of the 117th Congress, at this point it will be easier to get rid of the TCJA's increase in the basic exclusion amount.
(xiii) See T.D. 9884 and the 2019 regulations under IRC Sec. 2010, which prevent such a "reclaim".
(xiv) IRC Sec. 1 (h). Including profit from the sale of a business; For example, the part that is generally attributable to goodwill.
(xv) An increase of more than 20 percent.
(xvi) Affordable Care Act. The Tribunal gave oral hearing against Texas on November 10, 2020 in California (No. 19-1019). Based on the questions asked by the judges, many observers believe that ACA will not be knocked down.
(xvii) IRC Sec. 1411.
(xviii) Republicans controlled both sessions of the 114th Congress.
(xix) IRC Sec. 1014.
(xx) What if market valuation was limited to marketable securities?
New York is playing with the idea of an annual mark-to-market-based tax for its 120 billionaire residents. A number of tax professionals have objected to this idea, some on constitutional grounds. See https://www.taxlawforchb.com/2020/12/new-yorks-proposed-billionaires-tax-bad-idea/.
(xxi) There is one district in New York that has not yet been certified by Albany.
(xxii) Of course, the estate tax and the GST tax can be levied on the death of the deceased. IRC Sec. 2001 and Sec. 2601.
(xxiii) There are many Congressmen among them.
(xxiv) Which may not be a bad thing when the property that is the subject of the gift is expected to appreciate significantly in value. Of course, if the donor taxpayer dies within three years of the gift being given, the amount will be added to the donor's gross estate if the gift tax is paid. IRC Sec. 2035.
(xxv) IRC Sec. 2503 (b).
(xxvi) It cannot be stressed enough: the services of an experienced and qualified appraiser are essential. No short cuts here. https://www.taxlawforchb.com/2017/05/why-care-about-business-valuation-part-i/.
(xxvii) As always, the transaction must make business sense to the grantor and the grantor must be familiar with assuming the credit risk.
(xxviii) IRC Sec. 671.
(xxix) The term should not exceed the life expectancy of the grantor at the time of the transaction.
(xxx) The long-term AFR for January 2021 – a term of more than nine years – is 1.35%.
(xxxi) Rev. Rul. 85-13.
(xxxii) Under IRC Sec. 7520; currently set at 0.60 percent.
(xxxiii) IRC Sec. 2702.
(xxxiv) A so called "zeroth" GRAT.
(xxxv) See IRC Sec. 355 and Sec. 368 (a) (1) (D) in relation to corporate divisions; see IRC Sec. 731, 736, 704 (c) (1) (B), 737, 752 and Reg. Sec. 1.708-1 (d) in relation to partnership departments. https://www.taxlawforchb.com/2013/11/splitting-up-the-family-corporation/
(xxxvi) Rev. Rul. 59-60.
(xxxvii) https://www.taxlawforchb.com/2014/02/deferring-the-estate-tax-section-6166/.
(xxxviii) See IRC Sec. 2042. The insured must ensure that no incidents of ownership occur in relation to the policy.
The Irrevocable Life Insurance Fund (“ILIT”) may borrow funds from the estate or acquire assets from the estate and thus provide liquidity to the estate.
(xxxix) The first of three posts: https://www.taxlawforchb.com/2016/09/the-irs-takes-the-offensive-on-valuation-discounts-part-one/.
(xl) Historically low exam rate.
(View source.)