Let’s dance the 2 step!

Tax advisers and wealthy Americans have worked hard to place stakes in LLCs and other entities holding their investments in specially crafted irrevocable trusts, in the form of gifts or in exchange for promissory notes, in order to have arrangements well in advance of the signing of a new inheritance tax law that may prevent, or significantly reduce, the benefits associated with it.

Bernie Sanders Bill and September 13e The House Ways and Means Committee bills would have significantly reduced inheritance and gift tax exemptions by $ 11,700,000 per person, as well as the most popular and popular inheritance tax techniques. the most effective, but would have acquired vested interests in what is completed before the signing of these proposed new laws.

For many of us it was starting to feel like we were loading people onto life rafts on the Titanic, as there were many more families and assets than there were resources, like lawyers and hours into the day, given the thousands of Americans whose families would be subject to a 40% federal estate tax if they didn’t act quickly enough.

The situation was exacerbated by the rise in the stock market and the surge in real estate values.

The main threats were the reduction of the inheritance tax exemption from $ 11.7 million to around $ 6 million next year, the inability to make transfers to a trust that would not be taken into account. account for income tax purposes and inability to assess partial or non-voting ownership. participations in LLCs and other entities at reduced prices.

Just a day or two ago, many expected there would be a tax on billionaires instead, but maybe billionaires contacted their senators and congressmen (“their” as well. meaning Senators and Congressmen where they live as opposed to ownership, but I don’t know which is which), which leads us to think that a uniform haircut for all taxpayers over 6 million dollars per person could be expected.

Then, as time seemed to be running out and we eagerly waited to see what President Biden would say today, and in particular, whether he would get 50 senators to cooperate with one of the inheritance tax exemption laws , we heard… …………… nothing.

President Biden did not mention inheritance taxes, so thousands of tax professionals and families were unsure whether to breathe or not, or perhaps breathe easier, but not as easily as it is. hoped, but we can breathe easier now because a “Build The Back Better Framework” document was released by the White House briefing room, providing a few pages of summary documentation on the tax increases that didn’t include none of the previously proposed changes to the federal estate tax rules described above, or the other proposed changes that would have removed with annuity trusts retained by grantors, certain master charitable annuity trusts, personal residence trusts qualified and tax-free exchange of assets between grantors and the trusts they have established. Limited Access Spousal Trusts (“SLAT”) have become a household word and will continue to be very popular (see Forbes blog Inheritance Tax Law Changes – What to Do Now, September 14, 2021).

That’s not to say it can’t be introduced later, but for now, it’s at least unexpected.

Many families have used what is known as the “Biden 2-Step”, making a relatively small donation to an irrevocable trust, and then selling an LLC or other interest to the trust in exchange for a note to the trust. long term order at low interest rate. This was step 1. Step 2 would be to cancel the note immediately before the adoption of a reduction in the balance of the inheritance tax exemption, or whenever the donor was prepared to do so. to do. Now step 2 may not have to happen, and the donor can keep the note, and a higher degree of personal financial stability having future growth in value outside of his estate, while he pays the income tax earned by the trust and receive small, tax-free interest payments from the trust.

So there are now thousands of wealthy family trust schemes in place, or in the process of being put in place, that will still be needed when the inheritance tax exemption is reduced to half the level otherwise applicable in 2026. , or before that, or when their active values ​​exceed the limits, even if they do not go down.

Instead, we have new Medicare top income taxes that use S corporations and partnering entities to protect themselves from this 3.8% tax, a surtax on people with incomes over $ 400,000 per year. year, reduced loopholes available to businesses and individuals who use foreign companies to avoid or defer income, and limitations on write-offs of business losses, to name a few.

The latest version of the Build Back Better Act was released today by the House Ways and Means Committee, and all 1,684 pages of it can be viewed by clicking here.

I will discuss the above situation and other issues with Brandon Ketron during a free live webinar on Saturday, October 30.eat 11:00 a.m. EDT, and we’ll answer questions from the public at that time. You can email [email protected] for a free invitation and a proofread link.

Thank you to all readers who have asked us great questions about estate and gift tax planning. I can now schedule vacations with Marcia and the dogs, which will be canceled if the flavor of the day returns to an increase in inheritance tax.

Thanks to Brandon Ketron, CPA, JD, LL.M for his contribution to this position.


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