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In the current environment, investors should develop their planning strategies and review key documents to address the potential impact of tax policy changes.

Updating your plan can be a challenging exercise, particularly in light of increases in government spending, accompanied by proposals for sweeping tax reform being debated.  Since a new administration enacted and announced spending increases, it makes the possibility of Congress enacting tax policy changes and increases very likely.  Current proposals include the reduction or elimination of certain tax measures that have guided how investors protect and preserve their wealth in recent years.


To address change as we move forward, we’ve put together a snapshot of possible changes along with planning actions to consider. The list is broken into four categories:


  • Document status
  • Estate and gift tax
  • Transfer vehicles
  • Income tax



Wills (including living wills), trusts, durable power of attorney, health care directives, life insurance policies and retirement plans. Address basic planning needs, especially in light of ongoing ramifications from the coronavirus pandemic. What does the health care directive say about intubation and use of a ventilator? Confirm named fiduciaries (executor, trustees, and guardians). Review older documents to determine if formula clauses still make sense. Update beneficiaries of life insurance policies and retirement plans.



Estate, gift and generation-skipping transfer tax rates Proposals may result in the estate, gift and generation-skipping transfer tax rates increasing from 40% to 55% or higher.
Annual exclusion The annual gift exclusion of $15,000 could be reduced or eliminated. Consider maxing out on annual gifts.
Qualifying transfers payments Consider making direct payments for tuition and medical expenses on behalf of another.
Lifetime exemption The lifetime exemption of $11.7 million could be reduced. Make gifts to use the current amount. There is no claw-back of use of the exemption if the amount of the exemption is later reduced.
Elimination of step-up in basis at death Elimination of the step-up in basis, if enacted, will result in heirs taking the decedent’s cost basis in inherited property – a so-called carryover basis. 
Applicable Federal Rate (AFR) and Section 7520 Rate. The Applicable Federal Rate (AFR), used to set interest rates for loans and sales to intentionally defective grantor trusts, and the Section 7520 rate, used to value GRATs, charitable lead trusts and private annuities, are very low, making leveraged techniques extremely effective planning devices.
Intrafamily loans Consider making loans to family members or refinancing existing loans to take advantage of a low interest rate environment.



Irrevocable Life Insurance Trust (ILIT)

Consider funding ILITs with income-producing property in the event the current gift tax annual exclusion of $15,000 is changed or eliminated. This will mean that the income from the trust assets can be used to pay life insurance premiums.

Grantor Trusts Establish and fund an irrevocable grantor trust this year in case the grantor trust rules are changed.
Grantor Retained Annuity Trusts (GRATs) Establish and fund a GRAT.  May be best to use laddered GRATs rather than rolling GRATs due to the possibility of future adverse changes to GRATs, such as the elimination of a “zeroed-out” GRAT.
Spousal Lifetime Access Trusts (SLATs) Establish and fund SLATs with spouse as a discretionary beneficiary to use gift tax exemption. Avoid reciprocal SLATs. 
Domestic Asset Protection Trust (DAPT) Establish a DAPT in one of the 19 states, such as Delaware, that have DAPT statutes for asset protection purposes.
Generation-Skipping Trusts (GST) Allocate part of the increased generation-skipping transfer tax exemption to an existing non-exempt generation-skipping trust, to lower or eliminate the inclusion ratio.
Dynasty Trust

Establish a dynasty trust and allocate GST exemption. Possibility of future 50-year (+/-) term limit on dynasty trusts.

Family Limited Partnerships (FLPs) and Limited Liability Companies (LLCs)

Fund now and transfer minority interests before year-end to take advantage of the $11.7 million exemption and the possibility of valuation discounts being eliminated in the future. 

Upstream planning

Transferring assets to a senior generation, or a trust granting a general power of appointment to a senior generation beneficiary, may backfire if the exemption is reduced, thereby causing the assets to be included in the senior generation’s estate generating a federal estate tax liability.



Charitable donations Consider making charitable gifts to circumvent higher income tax rates and use appreciated securities to potentially work around any increases in capital gains tax rates.
Non-qualified or incentive stock options (ISO) Future tax rate increases may make an earlier exercise advisable, particularly if option values are low and current income is expected to increase.  Exercise of ISO will generate an alternative minimum tax (AMT) preference.
Retirement accounts
Review planning for IRAs and 401(k) plans, given drastic changes to the distribution rules made by the SECURE Act. Only “Eligible Designated Beneficiaries” (EDB) qualify for a “stretch-out.” Most others are subject to a 10-year pay-out. For plan benefits payable to a trust, an accumulation trust may now be better than a conduit trust. In addition, age for required minimum distributions (RMDs) begins at age 72, up from age 70 1/2.

Roth conversion
Convert a traditional IRA into a Roth IRA when taxable income may be lower. Best to pay tax generated by conversion with assets outside IRA.  Charitable gifts may make sense to offset increase in taxes caused by a Roth IRA conversion.
Pre-immigration planning
Prospective immigrants to the U.S. can save estate taxes and, if done 5+ years ahead, income taxes also, by funding trusts for heirs before becoming U.S. taxpayers. In addition, by selling appreciated assets outright or for installment notes before immigrating they can avoid U.S. capital gains tax. These tactics are even more critical given the prospect of higher tax rates and lower exemptions.

Planning for U.S. heirs Pre-death planning is critical for non-U.S. family members with U.S. children and who stand to inherit their assets held in entities such as offshore companies. Absent planning, potentially higher ordinary income taxes may be due on embedded gains.



Regardless of which proposals may be passed by Congress, it’s never a good strategy to wait and later react to the impact of those changes. It’s critical to take steps today to evaluate potential implications of higher taxes and strategies to protect wealth. It’s important to review your plan on a regular basis to take advantage of these opportunities and mitigate adverse results.


We are here to help with effective positioning in all market cycles, and to address the impact of future changes in tax policy.

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