Estate planning

Potential changes threaten estate planning strategies and create an urgency for action Darrow and Everett LLP


Representative Will Rogers is widely credited with saying that “the only difference between death and taxes is that death doesn’t get worse every time Congress meets.” While most taxpayers fear that tax laws will change for the worse, taxes on estates and gifts have become more taxpayer-friendly over the past decade despite public opposition.

In 2010, the estate tax was phased out entirely and $9 billion worth of real estate was passed without any estate taxes being paid.(1) Although estate and gift tax laws are rarely updated, such a large transfer of tax-exempt wealth has fallen short of many lawmakers. This led to the Unemployment Reinsurance and Job Creation Tax Relief Act of 2010 and the American Taxpayer Relief Act of 2012. Together, these laws restored estate and gift taxation, but exempted real estate valued at or less than $5,000,000 (adjusted for inflation) in 2010. Tax credit form. The Tax Cuts and Jobs Act of 2017 doubled that credit but includes a provision to automatically return the estate tax credit in 2026 to the amount set by the American Taxpayer Relief Act of 2012. That is, unless new legislation is enacted.

While we should never plan to eliminate taxes completely, we should always plan to reduce the tax burden. One common strategy for this is to use foundation move planning trusts, or to remove assets from taxable estates entirely. Recent political pressures are mounting against such strategies, and there may be an opportunity to capitalize on them.

Basically step-up

When property passes through the taxable estate of the deceased, the property receives a step up to fair market value. For example, if a deceased person purchased a home for $25,000 (and kept the $25,000 principal throughout their life) but the home value is $500,000 as of the date of the decedent’s death, the principal in the hands of the deceased’s heirs is $500,000. This means that the heirs can sell the home for $500,000 the next day, and there will be no taxable gain. This finding applies to other assets as well, creating planning benefits for any taxpayers who have an asset appreciated at the time they prepare their estate plan.

Revocable Trust Funds

Seasoned estate planners have used revocable trusts to move assets out of their ownership The legacy of the willwhile keeping the assets in their possessions Taxable real estate. By placing assets in a revocable trust, the legal ownership of the asset is given to a separate legal person. In many jurisdictions, a The legacy of the will It includes only assets that the deceased had legal title to. This simplifies the bequest process. Although legal ownership is granted to a separate legal person, a revocable trust is treated as the same taxpayer as the decedent, with the decedent having the full power and authority to revoke the trust and recover the assets from the trust. This means that the property will remain in the deceased’s home Taxable real estate Any income earned from the trust assets will be passed on to the deceased’s tax return up to the date of death.

Irrevocable trust

Experienced tax planners can use these rules to accomplish the opposite transaction through the use of Irrevocable Trusts. A properly structured irrevocable trust can remove assets from Taxable real estate from the deceased, effectively eliminating estate taxes on the assets, but still passing through income tax to the grantor (which will eventually be paid at a lower tax rate). This is a particularly useful strategy when the taxpayer has assets that have not appreciated significantly before the time of the transfer or are expected to rise significantly after the transfer. On March 29, 2023, the Internal Revenue Service issued Revenue Ruling 2023-02 reaffirming this tax planning strategy, by acknowledging that assets have been removed from Taxable real estatealthough an irrevocable trust is structured to pass income taxes on to the grantor.

current legislative landscape

On March 9, 2023, the Biden administration released its public interpretations of the administration’s revenue proposals for fiscal year 2024 (also known as the 2024 Green Book), which include a variety of proposed changes to the tax code. Many of the proposed changes were considered during the Obama and Biden administrations. Indeed, some of these proposals were present in the Build Back Better Act when it was negotiated in 2021, but were ultimately not included in the Infrastructure Investments and Jobs Act passed on November 15, 2021.

One of the proposed changes is to tax the deceased’s estate when appraised assets are transferred to heirs, and apply income tax to the difference between the deceased’s basis and the fair market value. This would effectively reverse the benefits that come with escalation in the first place; Instead of escaping income tax after the date of death, this would accelerate the imposition of income tax on assessed property, creating a tax liability from the date of death.

In addition, there is another proposed change that would impose a minimum income tax of 25% on properties with a net worth of $100 million or more, which appears to include accelerating the capital gains discussed earlier in this article. The minimum tax will only be calculated on the value that exceeds the $100 million threshold. Payments of this minimum tax will be treated as a prepayment of subsequent taxes due when the assets are eventually sold.

State real estate taxes

While this article focuses on federal estate tax planning strategies, these strategies can be applied to state estate taxes as well. Currently, 12 states plus the District of Columbia have estate taxes, and six states have inheritance taxes (which are levied on the recipient, not the estate). Each state can set its own tax rates and exemption. For example, the property tax exemption in Rhode Island is $1,733,264, in New York it is $6,580,000, and in Connecticut it is $10,000,000. The maximum estate tax rate in each of these states is 16%, 16%, and 12%, respectively. This means that the deceased’s New York estate would pay 52 cents of every dollar over $13 million of value in the taxable estate (absent proper tax planning). The legislative landscape at the state level is constantly changing, so plans should be reviewed and updated regularly to ensure that changes in federal and state law are taken into account.


Many of the federal proposals outlined above are included in the 2023 Greenbook and other legislative proposals, and such sweeping changes could remove many of the gift and estate tax planning strategies that taxpayers have used over the past decade. Given the current economic climate, we could see a significant wave of support for changes to property and gift tax laws like we saw in 2010 and 2012, allowing now time to work on leveraging the existing rules before the new rules go into effect.


(See source.)


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