2020 is in the rear view mirror at long last, and 2021 brings with it a new administration in the White House, a new Congress, and the likelihood that changes in Washington will bring changes in the tax laws. The following is a summary of recent changes in the law, in case you missed last year’s update, as well as a brief list of planning opportunities that some of our clients should consider implementing prior to the effective date of any of the potential tax law changes.
See below for:
∙ Review of the 2020 Illinois Trust Code and Federal Tax Law changes
∙ 2021 gift and estate tax exemption amounts
∙ Potential changes to the gift and estate tax exemptions
∙ Planning opportunities to consider before the potential changes become effective
∙ A reminder for our clients who have changed their primary residency out of Illinois
Review of Changes in 2020 (see our January 2020 newsletter on our Web site for details)
∙ Illinois Trust Code. As detailed in our newsletter last year, on January 1, 2020 Illinois adopted a new
Trust Code. By updating your trust agreement, you may:
∙ specify which beneficiaries will receive trust accountings;
∙ authorize your spouse or another agent under your Power of Attorney to make trust amendments
in the event you are living but unable to amend your trust agreement yourself;
∙ name a “designated representative” for beneficiaries between 18 and 30.
∙ SECURE Act. Along with many other income tax changes, the SECURE Act changed the rules for
distributions from inherited IRAs. With certain exceptions, a non-spouse beneficiary must withdraw the
entire inherited IRA within 10 years. This new law requires changes to trust agreements if IRAs
may be payable, e.g., to Descendants’ Trusts for children.
2021 Gift and Estate Tax Exemption Amounts
∙ Annual gift tax exclusion: $15,000
∙ One-time federal gift and estate tax exclusion: $11,700,000
∙ Generation-skipping transfer tax exclusion: $11,700,000
∙ Illinois estate tax exclusion: $4,000,000
Potential Changes to the Gift and Estate Tax Exemptions
∙ The Biden administration may accelerate the sunset of the 2017 Tax Cuts and Jobs Act, which is currently
set to expire at the end of 2025. If that is done this year, the federal estate tax exclusion would
revert back to $5,000,000, indexed for inflation (approximately $5,500,000).
∙ It’s possible the Biden administration may reduce the federal estate tax exclusion amount even further;
$3,500,000 has been floated.
∙ If the federal estate tax exclusion is reduced, the generation-skipping transfer tax exclusion will
likely be reduced to the same level.
∙ If the federal estate tax exclusion is reduced, I might speculate that Illinois may decide to match the
federal exclusion.
Estate Planning Opportunities
∙ Stretch Out the Income Recognition on Inherited IRAs. The SECURE Act reduced the time period for withdrawing funds from an inherited IRA by a non-spouse beneficiary to 10 years, with certain exceptions. For those clients who are philanthropically inclined, you may consider making your IRA payable to a Charitable Remainder Trust for your children. The trust is established upon your death for your child’s lifetime. A certain percentage of the trust balance is distributed from the trust to your child annually. He or she pays income tax on any portion of the distributions which “carry out” trust income. This stretches out the payments to the child from the IRA, as well as the income recognition, over a longer period of time than if your child inherited the IRA directly, and had to take distributions over 10 years.
∙ Large Gifts to Utilize the Soon-to-Disappear Higher Exclusion Amount. Clients who are higher net worth may want to make gifts in excess of the potentially lower federal estate tax exclusion amount early in 2021, before legislation is passed. In order to take advantage of the currently higher exclusion amount, you would have to gift more than the exclusion amount is expected to be at your death, in order to utilize the higher exclusion.
For example, let’s say the exclusion amount is expected to decrease to $5,500,000, and your taxable estate is currently $20,000,000. And let’s say this year you gift $8,500,000 using a portion of the current $11.7M exclusion. You will have used the $5,500,000 of exclusion that is expected to remain in the law, as well as $3,000,000 of exclusion that would otherwise disappear after the law changes. You will have used all of the exclusion that remains available as of your date of death, so that upon your death the remainder of your estate will be subject to estate tax, other than any exclusion remaining on your death due to future inflation index increases in the exclusion. However, you will have gifted $3,000,000 (and the after-gift growth associated with it) that will not be subject to estate tax upon your death. Please contact one of our attorneys to discuss whether this level of gifting is appropriate in your specific situation.
There are several gifting strategies that may be employed to achieve your goal of utilizing the higher estate tax exclusion. These include:
∙ Outright gifts
∙ Gifts to a Spousal Lifetime Access Trust (“SLAT”)
∙ Gifts to trust for children or grandchildren
∙ Gifts in the form of Family LLC interests
∙ Split-interest gifts to a charitable trust
∙ Generation-Skipping Transfers. I have seen mention that future legislation may curtail the ability to create trusts that can pass from one generation to the next without estate tax being imposed. “GST” exempt trusts may be created in conjunction with one of the above gifting strategies now, and would more than likely be grandfathered under the current GST rules.
∙ Valuation Discounts. Many clients transfer interests in closely-held businesses, Family LLCs or real estate, leveraging valuation discounts for lack of marketability, lack of control, and other restrictions to stretch their gift tax exemptions. Restrictions on these discounts have been threatened in the past, and may become law in the future. Clients who are considering transfers of interests in LLCs or other entities may want to start that process soon, to take advantage of the valuation discounts while they still can.
∙ Primary Residence Established in Another State. Many of our clients are establishing residency elsewhere, but still maintaining a residence or ownership of other residential or commercial real estate here in Illinois. Here is a way for our “non-resident” clients to alleviate the potential Illinois estate tax that may be due on death. If your total estate is worth $4,000,000 or more, even if your Illinois real estate is worth less than the Illinois $4,000,000 estate tax exclusion, there may still be an Illinois estate tax due. The Illinois estate tax calculation takes into account the value of your entire taxable estate wherever located; the Illinois estate tax is then calculated on that entire value; and the resulting tax amount is pro rated based on the ratio that the value of your Illinois real estate is to the value of your entire estate. This can be remedied by changing the form of ownership of your Illinois real estate. Please contact our office to discuss your particular situation, and we will recommend one of several options to move your Illinois real estate out of the reach of the Illinois estate tax.
Please contact our office any time to discuss these or other questions or concerns.
We look forward to hearing from you! In the meantime, be safe.
See below for:
∙ Review of the 2020 Illinois Trust Code and Federal Tax Law changes
∙ 2021 gift and estate tax exemption amounts
∙ Potential changes to the gift and estate tax exemptions
∙ Planning opportunities to consider before the potential changes become effective
∙ A reminder for our clients who have changed their primary residency out of Illinois
Review of Changes in 2020 (see our January 2020 newsletter on our Web site for details)
∙ Illinois Trust Code. As detailed in our newsletter last year, on January 1, 2020 Illinois adopted a new
Trust Code. By updating your trust agreement, you may:
∙ specify which beneficiaries will receive trust accountings;
∙ authorize your spouse or another agent under your Power of Attorney to make trust amendments
in the event you are living but unable to amend your trust agreement yourself;
∙ name a “designated representative” for beneficiaries between 18 and 30.
∙ SECURE Act. Along with many other income tax changes, the SECURE Act changed the rules for
distributions from inherited IRAs. With certain exceptions, a non-spouse beneficiary must withdraw the
entire inherited IRA within 10 years. This new law requires changes to trust agreements if IRAs
may be payable, e.g., to Descendants’ Trusts for children.
2021 Gift and Estate Tax Exemption Amounts
∙ Annual gift tax exclusion: $15,000
∙ One-time federal gift and estate tax exclusion: $11,700,000
∙ Generation-skipping transfer tax exclusion: $11,700,000
∙ Illinois estate tax exclusion: $4,000,000
Potential Changes to the Gift and Estate Tax Exemptions
∙ The Biden administration may accelerate the sunset of the 2017 Tax Cuts and Jobs Act, which is currently
set to expire at the end of 2025. If that is done this year, the federal estate tax exclusion would
revert back to $5,000,000, indexed for inflation (approximately $5,500,000).
∙ It’s possible the Biden administration may reduce the federal estate tax exclusion amount even further;
$3,500,000 has been floated.
∙ If the federal estate tax exclusion is reduced, the generation-skipping transfer tax exclusion will
likely be reduced to the same level.
∙ If the federal estate tax exclusion is reduced, I might speculate that Illinois may decide to match the
federal exclusion.
Estate Planning Opportunities
∙ Stretch Out the Income Recognition on Inherited IRAs. The SECURE Act reduced the time period for withdrawing funds from an inherited IRA by a non-spouse beneficiary to 10 years, with certain exceptions. For those clients who are philanthropically inclined, you may consider making your IRA payable to a Charitable Remainder Trust for your children. The trust is established upon your death for your child’s lifetime. A certain percentage of the trust balance is distributed from the trust to your child annually. He or she pays income tax on any portion of the distributions which “carry out” trust income. This stretches out the payments to the child from the IRA, as well as the income recognition, over a longer period of time than if your child inherited the IRA directly, and had to take distributions over 10 years.
∙ Large Gifts to Utilize the Soon-to-Disappear Higher Exclusion Amount. Clients who are higher net worth may want to make gifts in excess of the potentially lower federal estate tax exclusion amount early in 2021, before legislation is passed. In order to take advantage of the currently higher exclusion amount, you would have to gift more than the exclusion amount is expected to be at your death, in order to utilize the higher exclusion.
For example, let’s say the exclusion amount is expected to decrease to $5,500,000, and your taxable estate is currently $20,000,000. And let’s say this year you gift $8,500,000 using a portion of the current $11.7M exclusion. You will have used the $5,500,000 of exclusion that is expected to remain in the law, as well as $3,000,000 of exclusion that would otherwise disappear after the law changes. You will have used all of the exclusion that remains available as of your date of death, so that upon your death the remainder of your estate will be subject to estate tax, other than any exclusion remaining on your death due to future inflation index increases in the exclusion. However, you will have gifted $3,000,000 (and the after-gift growth associated with it) that will not be subject to estate tax upon your death. Please contact one of our attorneys to discuss whether this level of gifting is appropriate in your specific situation.
There are several gifting strategies that may be employed to achieve your goal of utilizing the higher estate tax exclusion. These include:
∙ Outright gifts
∙ Gifts to a Spousal Lifetime Access Trust (“SLAT”)
∙ Gifts to trust for children or grandchildren
∙ Gifts in the form of Family LLC interests
∙ Split-interest gifts to a charitable trust
∙ Generation-Skipping Transfers. I have seen mention that future legislation may curtail the ability to create trusts that can pass from one generation to the next without estate tax being imposed. “GST” exempt trusts may be created in conjunction with one of the above gifting strategies now, and would more than likely be grandfathered under the current GST rules.
∙ Valuation Discounts. Many clients transfer interests in closely-held businesses, Family LLCs or real estate, leveraging valuation discounts for lack of marketability, lack of control, and other restrictions to stretch their gift tax exemptions. Restrictions on these discounts have been threatened in the past, and may become law in the future. Clients who are considering transfers of interests in LLCs or other entities may want to start that process soon, to take advantage of the valuation discounts while they still can.
∙ Primary Residence Established in Another State. Many of our clients are establishing residency elsewhere, but still maintaining a residence or ownership of other residential or commercial real estate here in Illinois. Here is a way for our “non-resident” clients to alleviate the potential Illinois estate tax that may be due on death. If your total estate is worth $4,000,000 or more, even if your Illinois real estate is worth less than the Illinois $4,000,000 estate tax exclusion, there may still be an Illinois estate tax due. The Illinois estate tax calculation takes into account the value of your entire taxable estate wherever located; the Illinois estate tax is then calculated on that entire value; and the resulting tax amount is pro rated based on the ratio that the value of your Illinois real estate is to the value of your entire estate. This can be remedied by changing the form of ownership of your Illinois real estate. Please contact our office to discuss your particular situation, and we will recommend one of several options to move your Illinois real estate out of the reach of the Illinois estate tax.
Please contact our office any time to discuss these or other questions or concerns.
We look forward to hearing from you! In the meantime, be safe.
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