Year-End Estate and Gift Tax Planning for Tax Professionals

Tax professionals may find themselves resting a little more easily this time of year than they were in 2021. Recall, for example, several proposals from the House Ways and Means Committee, including the anxiety-inducing “For the 99.5% Act.” As we saw in the flurry of draft legislation last year, there appears to be a concerning and seemingly growing movement in Washington to attempt to crack down on many of the tried-and-true estate and gift tax planning strategies we, as tax professionals, so commonly recommend.

One of the most glaring examples of this movement was the proposed Section 2901, Application of Transfer Taxes. Its primary objective was to curtail the usage of planning with irrevocable grantor trusts. At our office, this planning is almost a daily occurrence. Of course, estate and gift tax planning professionals collectively breathed a sigh of relief when the concerning proposed legislation seemed to vanish over the period of a few days. But is the proposed legislation now gone for good?

Let’s turn to the upcoming year-end. Divided control of Congress between Democrats and Republicans is certain. Given such slim majorities in both the House of Representatives and the Senate, it’s unclear what legislation could still be passed in the next two years. Now that much of the legwork attributable to drafting the initial proposed estate and gift tax legislation was completed in 2021, there remains a risk that such legislation could resurface in the bargaining process and be quickly enacted. This possibility leaves tax professionals with a choice:

• Eat too much turkey, enjoy the holiday season, and roll the dice that no changes occur in 2023; or
• View 2021 as a cautionary tale. Proceed full speed ahead with estate and gift tax planning next year.

If our recommendation were to proceed with option one, this would be a short commentary. We believe that option two is the best course of action for tax professionals, irrespective of the midterm election results. The question then becomes, what to do?

As most tax professionals are aware, estate, gift, and generation-skipping transfer tax exemption amounts are at historic highs. In 2022, such exemption amounts are $12.06 million per individual ($24 million-plus per married couple). Such exemption amounts are indexed for inflation and will increase to $12.92 million per individual (or double that amount in the married couple context) in 2023. These amounts often are reduced or exhausted during life through making taxable gifts for estate and gift tax planning purposes.

Tax professionals should be aware that the historically high exemption amounts are set to decrease to prior lower levels (approximately $6 million to $7 million per individual) in 2026. Of course, if the proposals we saw in 2021 are resurrected, the historically high exemption amounts could be reduced much sooner.

To the extent a client’s net worth is in excess of the exemption amounts, the family could face a significant 40% estate tax assessed on the excess value of their estate upon death. In 2021, some rumblings sought to increase the estate tax rate significantly. Tax professionals should therefore take on a use-it-or-lose-it mentality with respect to these exemption amounts for the right clients and ask themselves the following questions:

• Do my clients have potentially taxable estates under current law?
• Would my clients have taxable estates in 2026 once the exemption amounts decrease?

If the answer is yes to either such question, the tax professional should consider recommending certain strategies to freeze the growth of the taxable estate and ultimately reduce it. The authors commonly implement the following strategies for these clients:

• Creating and funding family limited partnerships or family limited liability companies;
• Gifting and/or selling assets (or family LPs and family LLCs’ interests) to intentionally defective grantor trusts, or selling such assets to beneficiary defective trusts; and
• Intra-family loans and potential future loan forgiveness.

Certain strategies may spill over to planning in 2023 and beyond, depending on the circumstance, but others may be implemented quickly and locked in prior to year-end. Doing so ensures that increased exemption amounts can be fully utilized regardless of future legislative uncertainty.

Additionally, tax professionals should advise clients that continually rising interest rates impact the applicable federal rate, which is an IRS-prescribed interest rate that is updated every month. With respect to the above-referenced transactions, clients generally desire the lowest AFR rate obtainable to maximize the wealth transfer benefits. For context, the long-term AFR rate for November 2022, with an annual period for compounding, is 3.92%. In November 2021, this AFR rate was 1.86%. Long story short: As the AFR rate increases, the above-referenced strategies become less efficient if the goal is maximum wealth transfer.

We recommend that all tax professionals enjoy this exciting holiday season. But instead of that third plate of mashed potatoes and stuffing, shoot a few emails to your clients to keep them ahead of the game.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

J. Scot Kirkpatrick is a shareholder in the Atlanta office of Chamberlain Hrdlicka and head of the office’s trusts and estates practice group. He primarily represents high-net-worth individuals and their families in a wide variety of estate and tax law matters.

Stephen C. Heymann, senior counsel in Chamberlain Hrdlicka’s Atlanta office, focuses his practice on helping business owners and high-net-worth families preserve wealth through sophisticated income and wealth transfer tax planning strategies.

Jasmin N. Severino is an associate in the Atlanta office of Chamberlain Hrdlicka, where she helps clients establish estate and business succession plans and assists them with wealth preservation plans.

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