With the uncertainty we face during the COVID-19 pandemic, the need for effective estate planning has become more apparent. Furthermore, the prospect of important changes to the federal transfer tax regime makes 2021 the ideal time for attorneys to help their clients focus on updating old estate planning documents, create new ones to ensure assets pass to clients’ intended beneficiaries, and advise them about wealth transfer techniques to take full advantage of the current federal transfer tax laws before any amendments occur.
If 2020 has taught us anything, it is to expect anything. Hence, more than ever, is the perfect time for clients to review or put in order their estate planning documents—wills, revocable trusts, powers of attorney, and health care directives—to ensure they are current, they reflect accurately their wishes and are flexible enough to take into consideration potential amendments to the transfer tax laws.
In 2021, the federal transfer tax laws allow each person to transfer $11.7 million free of federal estate and gift tax to their descendants or intended beneficiaries. That federal exemption sum is set to expire on Dec. 31, 2025, and revert to $5 million for each person, taking into account the inflation. Nonetheless, it is expected that Congress will pass new tax legislation, possibly in 2021 or 2022, reducing the federal estate tax exemption sum to $5 million or even $3.5 million.
Moreover, new legislation could be passed that would abolish the preferred step-up in basis for income tax goals of a person’s assets at death.
At present, New Jersey does not have an estate tax, having abolished it on Jan. 1, 2018. Nonetheless, many think that a permanent repeal of the New Jersey estate tax is unlikely, and it might be reinstated in the future.
Flexibility to address amendments to the transfer tax laws is essential for any viable estate plan. For legally married couples, having assets pass outright to a surviving spouse at the first death is fairly simple, but provides little flexibility for future tax planning. Attorneys might advise that married clients instead consider the options for their estate planning documents that enable certain tax decisions to be delayed until after a person’s death. Two most viable options are utilizing a Disclaimer Trust or a Clayton Qualified Terminable Interest Property (QTIP) Trust.
Viable Estate Planning Options
• Disclaimer. If a donor make an irrevocable trust in 2021, the trust could integrate a provision allowing a beneficiary to disclaim some or all of the assets transferred to the trust. If assets are disclaimed, they could also be restored to the donor and the transaction would be treated as if it never took place, thereby avoiding an accidental gift tax and/or GST tax due to a retroactive amendment to the transfer tax laws. To be effective, the disclaimer must be made no longer than nine months after the date of the gift.
Hence, if a gift is made on April 1, 2021, or later, a valid disclaimer could be made up until January of 2022, again allowing the time needed to determine whether any changes to the transfer tax laws will be retroactive.
• QTIP Election. A married person could make a 2021 gift to an irrevocable trust for the benefit of his or her spouse, which could entitle for the marital deduction if a QTIP election is made. The trust could make provision that if no election is made, the assets would pass to an estate tax protected trust for the beneficiary spouse and would use some or all of the donor spouse’s lifetime gift tax exemption sum. If there is a retroactive amendment in the transfer tax laws, a QTIP election could be made to prevent an accidental gift tax. The donor spouse would not have to choose whether to make the QTIP election until and unless the gift tax return is due.
Thus, for a 2021 gift, the donor spouse would not have to make the QTIP election until April 15, 2022 (or Oct. 15, 2022, if the gift tax return is extended), which would allow time to determine whether any changes to transfer tax exemptions will be retroactive.
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