By: Edward Brown, Esq.
There is a new tax bill (the “Bill”) gaining traction in Congress that could end the ability for you to remove assets from your taxable estate by way of making tax-free gifts to a grantor trust.
To state this in a bottom-line fashion, if you have not already created an irrevocable grantor trust that removes assets from your taxable estate, and you want to reduce your taxable estate, the Bill requires you to form such a trust or make certain amendments before it is enacted into law, which could happen as soon as October. Otherwise, any later formed grantor trusts will be includable in your taxable estate as a result of the Bill.
If you happen to already have a grantor trust that is designed to remove assets from your taxable estate, that is a great start because such trusts will be grandfathered by the Bill, so assets will continue to be kept out of your taxable estate. You, however, cannot gift or sell additional assets to a trust (or swap assets with the trust) once the Bill is enacted without causing a part of that trust to be pulled back into your taxable estate. Therefore, you not only need to have an irrevocable “completed gift” grantor trust in existence before the date of the Bill’s enactment (again, which can be as soon as next month), but you must also transfer all the intended assets into the trust by that time.
As time will likely be of the essence, you should consider placing assets into a grantor trust before the Bill’s enactment into law.
What is a taxable estate? For now, an individual can have an estate of up to $11,700,000 without incurring any federal gift or estate tax. The Bill will likely reduce that threshold amount to around $6,000,000 (i.e., to about half). Therefore, if you fund a properly designed grantor trust with $11,700,000 before October (or whatever date the Bill becomes law), you will have successfully removed an extra $5,700,000 from your taxable estate (not to mention all the subsequent appreciation thereon and income therefrom).
What if I can transfer only $6,000,000 or less? Does that mean that I cannot get any benefit from acting now? To the contrary, gifts of $6,000,000 or less before the date of the Bill’s enactment can still reap great rewards. For example: you would still have a trust that allows you to enjoy the current grantor trust rules, which continue to whittle down your taxable estate by having you be responsible to pay the income taxes on the trust’s earnings (allowing the trust to grow tax-free at a more exponential rate); you can still add and sell assets tax-free to the trust before the Bill is enacted into law so that the trust can grow in value and accumulate income free of any estate or generation-skipping transfer taxes; and depending on how the final law will read (since it is all still in a state of flux), you can still engage in certain transactions with the trust tax-free (e.g., paying rent to the trust for use of its assets). Pre-enactment sales to the trust may be able to further reduce estate taxes if, for example, your tax-free sale of assets to the trust is in return for a “self-cancelling installment note,” which incurs no estate taxes, unless the new law ends up squelching that strategy). In any event, these benefits would not be available if you do not form the trust until after the Bill is enacted.
What is the estate tax rate? Currently the estate rate is 40% of the taxable estate’s value. The Bill would keep that rate intact. Once you have a taxable estate, you could be at the mercy of whatever Congress determines the rate should be at any given time. This can be an unsettling thought for some knowing that the governmental fiscal goals are aimed at “taxing the rich.”
Estate tax savings. For sake of argument and easy math, let’s assume that in the future, in the year of your death, the estate tax rate is 50%. If you were successful this month in shielding an extra $5,700,000 (even if those assets never appreciate over the rest of your life), you and your family avoid almost $3,000,000 in estate taxes (and likely much more considering the appreciating values of such assets and accumulated related income thereon).
If you can afford making gifts to a trust that benefits you and your family, this may be the time to commit, especially considering that the ability to take advantage of discounting the valuation of any gifts will also be greatly curtailed under the Bill.
Of course, the Bill is not yet law, and still needs to be approved by Congress and the President. Interim debates about the Bill’s final passage will surely result in changes to how the Bill’s final version will read when enacted into law, and may delay its passage, but the current proposals are the best indicator we have for the likely soon-to-be planning landscape.
However, regardless of whether the BIll passes, whether in a similar form to its current proposal or with significant alterations, action now would still be beneficial. The estate tax exemption is already scheduled to decrease at the start of 2026 under current law, and even if the Bill does not pass, the exemption may be reduced sooner by Congress. Additionally, the grantor trust provisions have been on the radar for some time as well, though this is one of the first significant bills amending those provisions. As a result, if you act now, even if the Bill does not pass, you will already be prepared for any potential future changes, as well as the already scheduled exemption reduction in 2026. Thus, regardless of what occurs with the Bill, you will have locked in the benefits of the current law, which will eliminate the need to scramble to address any changes that may occur in the future.
