Thursday, September 23, 2021
Lynnley Browning (Financial Planning), Treasury to Eye ‘Clawback’ of Estate and Gift Taxes From Trusts Used by the Wealthy:
Financial advisors know by now that Democrats’ proposed tax increases would prevent affluent investors from using trusts to pass on major wealth to their heirs.
What most advisors and even estate planners don’t know: There’s a separate existential threat to investors who use trusts to move assets out of their estate free of estate and gift taxes.
The threat doesn’t come from Congressional tax writers, who are fighting over how to raise taxes to pay for the Biden administration’s $3.5 trillion spending plan. Instead, it comes via a nearly unnoticed sentence in an obscure Treasury Department document released by the agency earlier this month.
Treasury is looking at whether the IRS could “claw back” taxes on gifts that investors have made under the higher estate and gift tax exemption levels in place since 2018, according to a little-noticed remark in the agency's priority guidance plan released on Sept. 9. The recapture would come once those higher thresholds expire come 2026.
The agency’s flagging of the issue “has the potential to claw back into a taxable estate transfers into trusts that were made when exemptions were higher,” said Michael Repak, a vice president and senior estate planner at wealth management firm Janney Montgomery Scott in Philadelphia.
“It’s really significant, and it’s going to upend a lot of the planning techniques that have been used over the past couple of years.”