As a consequence of the results in the U.S. Senate runoff elections in Georgia, the Democrats are, at least in theory, in a position to pass legislation via the “reconciliation process.” Under reconciliation, 51 votes are all that is needed to pass tax legislation, such as Economic Growth and Tax Reconciliation Relief of 2001 and the Tax Cuts and Jobs Act of 2017.
This is, of course, not a prediction that any legislation will pass. With control of the Senate so closely divided, all 50 Democrats would need to vote on a bill. This would appear to give various members significant input into the drafting of the legislation. Given that typically bills are not introduced in the first year of an administration until the spring, the precise changes will not be known for some period.
For those who are concerned about possible reductions in the federal gift, estate, and generation-skipping transfer tax exemptions and rises in the rates of these taxes, together with possible other changes, there may be still some time to act.
At this point, the effective date of any legislation is unknown. It is, of course, possible that legislation will be effective as of January 1, 2021, that is, retroactively. There is, however, a constitutional issue of due process when legislation negatively impacts taxpayers. It is possible that the Democrats will take the chance that the legislation would be held unconstitutional and make the effective date January 1.
There are some techniques that could be used at this point in time that hedge against possible retroactive changes. One technique would be to create a trust but make it revocable; the grantor would make the trust irrevocable if the effective date of legislation is favorable. A variation would be to create an irrevocable trust but have the beneficiaries disclaim their interests in the trust before the end of nine months (the federal and New York time limit), with the result that assets would revert back to the grantor.
For married couples, another technique would be to create a trust for the benefit of the spouse. The trust would qualify for the gift tax marital deduction. Because the deduction is elective, then the election would be made if the trust were created before the effective date of legislation. On the other hand, if the effective date of legislation is before the creation of the trust, then the marital deduction could be claimed for the trust. The only “cost” to the planning would be the transaction costs associated with setting up the trust.
In thinking about gifting, potential donors should consider the possibility that, as was suggested by President Biden while running for President, the so-called “step-up in basis” would be eliminated or, in the more extreme form, that gifts (during life and at death) would be treated as constructive sales for capital gains purposes. Thus, it might make sense for any gifting strategy to employ high basis assets or cash if there is a change with respect to recognition of gain.
Note that, under current law, there is no step-up for lifetime gifts. Instead, the donee takes as his or her basis the donor’s basis.
Finally, a disclaimer strategy will not work for outright gifts. By definition, a donee will have accepted the gift, thereby precluding a subsequent refusal to accept the gift, which is what a disclaimer is.
If you would like more information on how to prepare, please contact a member of Harter Secrest & Emery LLP’s Trusts and Estates Practice Group at 585.232.6500.