On May 10, 2022, Venable partner Kevin Ghassomian was quoted in Financial Planning on the Treasury Department’s little-noticed proposal that it would “claw back” the tax savings of several wealth planning strategies come 2026. According to the article, that’s the year when the historically high exemption levels for gift and estate taxes are due to be sliced in half. The proposal reflects the Biden administration’s concern that affluent Americans are racing to use clever strategies during the window to create “artificial” gifts to pass on tax-free wealth to future generations.
The April 26 proposal targets strategies in which a taxpayer gives assets to a beneficiary while maintaining control over or a substantial interest in them — what the Internal Revenue Service (IRS) considers to be a disguised gift that’s taxable. A common estate planning technique can also get caught — even though the strategy, of grantor-retained annuity trusts doesn’t technically involve artificial gifts. Under Treasury’s proposal, the IRS would calculate the tax bill of a donor who retains an interest of more than 5% of the value of assets she transfers to a GRAT under the lower exemption. If the donor dies before the trust’s term ends, that means her stake is pulled back into her estate — resulting in a bigger tax bill on assets she thought she’d moved out.
However, the proposal doesn’t affect nuts-and-bolts planning in which a donor bequeaths property while keeping control or possession of it while alive. For example, if Grandma and Grandpa have an estate worth $20 million and set their son up to inherit $7 million when they die, they can safely use their current exemption of over $24 million if they pass away after 2026.
“This is welcome certainty for taxpayers and their advisors who can now look to 'completed gift' techniques,” said Ghassomian.
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