Monthly Archives: December 2021

As 2021 draws to a close and the New Year dawns, we need to think of…tax planning! Some years Congress tweaks the laws more than other years. While 2021 held plenty of events: a coronavirus vaccine, new coronavirus variants, a new President, etc., it was a relatively quiet year for legislative changes impacting planning. At first, it seemed as though there could be substantial tax changes. But those changes were watered down, deferred, and may never materialize. Still, even in a quiet year, some things change due to inflation increases, etc.

Estate Tax Planning

Applicable Exclusion rises from $11.7 million in 2021 to $12.06 million in 2022.

GST Exemption rises from $11.7 million in 2021 to $12.06 million in 2022.

Annual Exclusion for present interest gifts rises to $16,000 in 2022.

Annual Exclusion for gifts to a Noncitizen Spouse rises to $164,000 in 2022.

In a few years, at the end of 2025, the Applicable Exclusion and the GST Exemption will revert to one-half of their current levels, in other words to $5 million, adjusted for inflation from the 2011 base year. This isn’t relevant for most Americans. However, if you have well over these amounts, you may want to consider removing these amounts from your estate while you still have the temporarily doubled Exclusion and Exemption to cover the transfers. You still have a few years before the law is set to change, unless Congress changes things dramatically before then.

Income Tax Planning

Standard deduction amount:

Married, filing jointly, increases from $25,100 in 2021 to $25,900 in 2022

Single, increases from $12,550 in 2021 to $12,950 in 2022

Head of household, increases from $18,800 in 2021 to $19,400 in 2022

State and Local Tax (SALT) deduction cap remains at $10,000 in 2022, though proposed legislation could increase that cap significantly.

The income tax brackets creep slightly higher, as well.

As you plan for 2022, remember to keep your receipts for expenses and charitable contributions. With the high standard deduction amount and the cap on State and Local Tax deductions remaining at $10,000, fewer taxpayers are itemizing. In fact, the percentage of taxpayers itemizing is less than half what it was before the Tax Cuts and Jobs Act of 2017. Now, less than 14% of taxpayers are expected to itemize. Before then, over 31% of taxpayers itemized. If you give to charity, you may want to group your charitable contributions into one year and itemize them in that one year. You can do this by giving to a donor-advised fund in one year. Then you can make grant recommendations from your donor-advised fund each year. This way, your tax planning won’t impact your favorite charities.

Let’s look at an example. John and Mary make $15,000 of charitable contributions to their church, alma mater, or other charities each year. They have state and local tax deductions above the $10,000 limit. They have a total of $25,000 of deductions and they’d be better off taking the standard deduction ($25,900 in 2022). Rather than giving $15,000 for each of three years to charity, they could give 3 x $15,000 ($45,000) in one year and they’d get a much better tax result. If they gave $45,000 in year 1 to a donor-advised fund, combined with their SALT deduction of $10,000, they’d have $55,000 of deductions instead of the standard deduction of $25,900. In years 2 and 3, they’d just have the SALT deduction of $10,000 and no charitable deduction but could still take the standard deduction ($25,900 in 2022). The charities would get their funds each year just as usual. John and Mary would get a much better tax result. In year 1, they’d have $55,000 of deductions instead of $25,900, an increase of $29,100. Their deductions in years 2 and 3 would not change. If John and Mary are in the highest income tax bracket, this increased deduction could save them over $10,000 in federal taxes.

A little planning can produce a much better tax result. Have a happy, healthy, and prosperous.

September usually brings the start of a new school year, cooler temperatures, football, and a time for reflection in the final quarter. This year, September brought concern, bordering on panic, over proposed changes to the Internal Revenue Code (“Code”) when Congress released legislation containing several proposals eliminating the benefits of many tried and true Estate Planning techniques. Estate Planning attorneys scrambled to understand the potential modifications to the Code that included acceleration of the reduction in the estate tax exemption amount, taxation of formerly non-taxable transactions between grantors and grantor trusts, eradication of valuation discounts, elimination of stepped-up basis at death, and increased tax rates. Former clients worried about prior transactions and anxious new clients rushed to utilize expiring techniques and the higher estate tax exemption amount. Once again as it did in 2020, the last quarter of the year threatened to overwhelm Estate Planning attorneys as they spent hours reviewing the Build Back Better Act (the “Act”), attending educational seminars, digesting articles, blogs, and opinion pieces about the Act, and calming nervous clients about the consequences of pending and prior transactions. The Act contained retroactive enactment dates giving attorneys and clients little opportunity to plan for the sweeping changes and underscoring the feeling that the sky was falling.

Estate planning went mainstream and even those with modest estates were apprehensive as newspapers and magazines published article after article scaring everyone into thinking that the Act would permanently and detrimentally alter the Estate Planning landscape. Temporary relief appeared at the end of October when the House Rules Committee released a revised version of the Act (H.R. 5376) eliminating the most egregious provisions including the higher individual and capital gains tax rates, the lower estate tax exemption amount, the rules taxing transactions between grantors and grantor trusts, and keeping both valuation discounts and stepped-up basis at death. As of this writing, the Act sits before an evenly split Senate. Critics of the Act point to rising inflation as an impediment to the Act becoming law, while proponents argue that the economic benefits that the Act would provide to lower income families would ease inflation long term. The Act seems to have stalled in 2021 even though this version reflects measured changes to the Code affecting mostly the wealthy: well-paid executives, athletes, entertainers, entrepreneurs selling a business, and non-grantor trusts.

The Act could pass sometime in 2022, but it’s likely that would require significant changes. Perhaps more likely, the Act will die altogether, although President Biden continues to express confidence that the Act will become law. Regardless of the status of the Act two things are clear: the sky is not falling and Estate Planning should be top of mind for all individuals. For clients with a taxable estate or in the top tax brackets, it makes sense to begin or complete planning sooner rather than later. Individuals can do this by utilizing the estate tax exemption amount prior to 2026, at which time it will be halved. Everyone should review their current plan with the aid of a qualified Estate Planning attorney to ensure that it still accomplishes their objectives. Your plan should focus on long-term goals rather than potential policy changes. The last three years have shown us that policy changes are inevitable; however, a flexible plan offers the best protection against future legislation and the unknown.

When you gather with family and loved ones for the holidays, talk about your collective values and how each individual views and measures success. What you learn might surprise you and cause you to reconsider your estate plan. Talk about steps everyone can take to achieve your collective and individual goals as support may come from untapped resources. Remember that when generational wealth transfer fails, it’s not always because of poor planning or failed investments, it’s often a breakdown of communication and trust. Engaging in these conversations at holiday gatherings may seem counterintuitive, but the festivities tend to reduce tension and encourage more frank discussions. You may consider creating a family statement or theme that provides an opportunity for everyone to feel included in decision-making. Consider how the plan you have implemented or failed to implement will look in six months, one year, five years, or even ten years. This may help unmotivated individuals complete Estate Planning or may cause you to revise your plan. If you have a family business or charitable intent, these suggestions may help uncover and resolve underlying issues and concerns.

After all the fuss surrounding the Act, it’s comforting to know that the Estate Planning world will continue mostly as it was. Even Jeopardy! has acknowledged that Estate Planning has gone mainstream with the following answer in the category “What Does It Prevent” on the December 9, 2021, episode: “A Living Trust: This court procedure to carry out the terms of a Will.” That answer, What is probate?, of course! The last two years have been some of the most tumultuous for Trusts and Estates attorneys and clients, alike. Let’s hope the New Year will bring a new calm to our world. 

Estate Planning attorneys have long recommended the use of closely-held entities such as family limited partnerships (“FLPs”) and limited liability companies (“LLCs”) to provide flexibility in allocating rights to profits and capital, to shift income and property appreciation from one generation to the next, and to provide asset protection. Individuals transfer assets to the entity in exchange for membership or partnership interests, which provide management control and income distribution rights, but which may be subject to certain restrictions set forth in the governing documents. These restrictions limit new owners to a class of individuals, usually the descendants of the original members or partners, although sometimes a spouse may be included. Limitations like this insulate owners from liability, provide concentrated management in one individual, and allow the owners to carry out their business and tax objectives. The manager of an entity owes fiduciary duties to the other members which protects the business from claims of ex-spouses, creditors, outsiders, or even adversarial family members. Family entities can be used in conjunction with other estate planning techniques that leverage discounts for minority interests or freeze values by allowing appreciation to escape taxation at death.

Many states use partnerships as the default for two or more individuals in business together. Sometimes the partners have a formal agreement called a partnership agreement, and sometimes it’s just a handshake. LLCs and limited partnerships, on the other hand, require more formal intent. For example, with an LLC, the members file Articles of Organization to establish the LLC and use an operating agreement to govern the day-to-day operation. The operating agreement generally contains provisions regarding when distributions of profits will be made, who will manage the company, who can own an interest in the company and under what circumstances, the duration of the entity, and what happens upon dissolution. Often, the operating agreement will include provisions that dictate what happens upon the death of an owner. These provisions may override the provisions of an individual member’s estate planning documents, although they should work in conjunction with one another. Questions can arise though when the provisions of estate planning documents conflict with provisions in the entity agreements. Let’s review an example based on facts from a real case.

Assume that Shirley and Warren created an LLC for their family business. The operating agreement (“Agreement”) gave each sibling a 50% membership interest (“Interest”) in the company which consisted of the right to distributions, allocations, information, and the right to vote on matters before the Members. Shirley and Warren included language in the Agreement that a member could transfer all or any portion of his or her Interest by obtaining the prior written consent of all the other Members unless certain limited exceptions applied. The exceptions included a transfer of Interest outright or in trust for the benefit of another Member and/or any person or persons who are members of the “Immediate Family.” The Agreement defined Immediate Family as living children and the issue of any deceased child of a Member. If the Member failed to transfer the Interest during life in accordance with the provisions of the Agreement and failed to dispose of the Interest through the Will, then the Agreement provided that upon the death of such Member, the Interest would pass to and immediately vest in the Immediate Family of the deceased Member. Shirley and Warren ran the business together for two years until Warren’s untimely death. Warren left behind four adult children, and his estranged wife, Annette.

Upon Warren’s death, his Will was admitted to probate and Letters of Administration were issued to his son, Benjamin. The Will did not dispose of Warren’s LLC interest but instead directed that his assets be poured over to his trust which distributed everything equally to his four adult children and named Benjamin as successor Trustee. Shortly before his death, however, Warren amended his trust to include a distribution of his home to his friend, Faye. The amendment also gave Faye his Interest. Benjamin, as Personal Representative and Trustee, refused to transfer the Interest to Faye citing the provisions of the Operating Agreement. Faye sued Benjamin and won in the trial court but lost when Benjamin appealed.

The appeals court focused first on determining whether it was the terms of Warren’s estate planning documents or the terms of the Agreement that would control the disposition of his Interest. That court determined that the laws of the state where the contract was made permitted the Agreement to dictate how the Interest would pass at death. As such, the Agreement vested title to Warren’s Interest in his adult children immediately upon his death thereby overriding the provisions of his estate planning documents and his true intent.

The example above greatly oversimplifies the case; however, it provides universal lessons. First, if you have an interest in a family entity, ensure that you transfer that interest in accordance with the terms of the governing instrument. In the facts above, Warren needed to obtain Shirley’s consent to transfer his Interest to Faye. Second, make sure that your estate plan works with the governing instrument for your entity. Here, Warren would have needed to transfer his Interest to Faye during life and obtain Shirley’s consent in accordance with the terms of the Agreement, rather than relying upon his estate planning documents at his death. Finally, if you are unaware of any governing instrument, understand the impact of local law on your interest in the entity and your overall estate plan. The opinion for the case did not indicate whether Warren’s estate planning attorney reviewed the Agreement, but it’s best to start with a review of the entity documents when dealing with any closely-held entity. Remember that even if you set up the business without the services of an attorney, the business is a legal entity, as is the transfer of your interest in it.

Family entities serve a vital role in accomplishing numerous estate planning goals like asset protection, shifting appreciation and income to the next generation, centralized management, stability, and continuation of business upon death. Family entities also provide the opportunity to leverage the benefits of other techniques to achieve more significant results during life by excluding assets from the gross estate and increasing valuation discounts. To achieve these benefits, it’s vital to operate the entity in accordance with its governing documents. If you have a business, now is a great time to ensure that your estate plan and business plan work together to accomplish your goals and to explore any options that you have.