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Act now or miss out on planning opportunities

Significant death tax increases have been proposed; action timing is critical.

Michael Dolan

May 13, 2021

3 Min Read
Estate planning paperwork with pen
TACTICS AVAILABLE: With Congress on a move to tighten estate taxes, there are moves you can make now. But those moves require significant planning and must be in place before new bills are passed. i_frontier/Getty Images

There has been a lot of activity in Washington since the November election. With all the noise coming from inside the Beltway, don't miss the impact of Senate Bill 994 — the "For The 99.5% Act." The bill is currently awaiting review in the Senate Finance Committee.

If passed in its current form, the impact for farm and ranch families could be catastrophic. While the proposed legislation purports to tax one-half of 1% of Americans, it effectively taxes the top 2% of Americans, based on net worth. The bill is being promoted as "taxing billionaires," yet proposes to reduce the death tax exemption to $3.5 million and the lifetime gift tax exemption to $1 million.

You may be excited to know that if you have a net worth of more than $3.5 million, you are now a billionaire. Hmmm … is this the new math, or maybe should someone buy some senators a new calculator? The act would also increase the lowest death tax rate from 40% to 45%, and establish a new top rate of 65%. It additionally aims to reduce the effectiveness of several planning tools currently available to help mitigate death taxation.

With land and equipment holdings, most farm and ranch families exceed the proposed $3.5 million threshold. Failing to effectively plan to mitigate growing taxation could mean that you’ll be the last generation of your family to continue to farm or ranch.

There are number of strategies available to deal with the issues raised by the bill's lower death and gift tax exemptions, and higher estate tax rates. However, most effective planning techniques have a level of complexity that requires several months to plan, design and properly implement. To be effective, they must be implemented prior to the effective date of the new legislation.

Tactics to consider

One of the available planning techniques is commonly known as a spousal lifetime access trust. This planning technique involves a gift of assets to an irrevocable trust for the benefit of your spouse (and possibly family members). The trust would allow future distributions to your spouse (or family members) from the trust. However, the transfer of assets to the trust will be considered a taxable gift and use any available death tax exemption you have remaining (currently up to $11.7 million).

The amount gifted and the future growth on the assets in the trust would then be outside of your taxable estate, which is a significant advantage if the exemption drops back to only $3.5 million. If the act passes, you will have taken advantage of potentially $8.2 million in tax exemption that will no longer be available to you. Tax savings for the next generation would be approximately $3.7 million after your death.

A spousal lifetime access trust is just one of several planning techniques currently available to take advantage of the existing higher exemption levels. If you have been procrastinating on getting your estate planning handled or counting on the existing large exemption levels remaining unchanged, wisdom would dictate that you should be considering taking advantage of the current planning opportunities.

If you've been watching Washington closely, politicians are passing legislation and spending money without thoughtful consideration of the significant impact and consequences to small businesses, farms, ranches, and middle-class working Americans. You may want to act as soon as possible to try and mitigate the impact on your family's future.

Dolan, an attorney, helps farm and ranch families achieve comprehensive estate, succession and legacy planning objectives. He is the principal of Dolan & Associates P.C. in Brighton and Westminster, Colo. Learn more on his website, estateplansthatwork.com.


About the Author(s)

Michael Dolan

Michael Dolan has been in private practice since 1989. He specializes in trust planning, estate planning, retirement planning, business succession planning, charitable planning, and asset protection. Mike speaks nationally for legal education providers, helping his legal colleagues advance their knowledge in a number of estate planning areas. He is recognized nationally as an expert in the area of generation skipping transfer tax exempt planning and estate planning practice management. He is based in Brighton, Colo.

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