Trust and Estate Update

And this exemption is use it or lose it. So, if it's sunsets, you won't have that bonus exemption and there's no clawback, so that if you make a gift, you won't pay tax on that bonus exemption. And the key is to use this exemption before it expires and to leverage it during your lifetime. And if the state tax does sunset, it's projected, again, to go to about half of what it is now, or let's say it is indexed for inflation, so let's say $7 million in 2026. And the key is that you have to use your base first before you use your bonus exemption. So a simple example of why you should use the exemption now and how much estate tax it saves is that if a taxpayer gives the remaining exemption, $13.61 million, and gifts it outright or to a trust, and we'll get into the discussion of SLATs, or spousal lifetime access trust, and even assume that the trust value stays the same, and the exemption does sunset to seven million.

He paid no estate tax, but if he did not make the gift now, he would've had a taxable estate of 6,610,000 after the exemption. So, the 1361 minus the $7 million exemption, and his estate tax at $2,644,000. So, you can see how you could save that just by using the exemption before it expires. And then if the trust grows beyond that 13.61 million, if it grew to 25 million, that's all out of your estate. So, if it grew to 25 million, it would result in estate tax savings of 7.2 million. And then there's also some state considerations as well, like New York, you can make gifts as long as they're not within three years of death, you can get them out of your estate.

And just keep in mind that the anti-clawback rules, as I mentioned, they only apply when the value of your lifetime taxable gifts exceeds the date of death exclusion. Like I said, you have to use your base first before you can use this bonus exemption. So, you want to lock in the higher exemption amount now. If you wait until 2026 to start giving, you'll only be able to give away $7 million tax-free. In any case, even if congress extends the exemption amount or you don't use any of your bonus exemption, starting your estate planning now is always a good idea because you remove future appreciation and income out of your estate.

Just real quick, some developments for 2024, the annual gift tax exclusion is 18,000, we talked about the state tax exemption, the GST exemption follows that. Interest rates have been creeping up over the years. I'm showing you the July rates, July 2024, 7520 rates and the applicable federal rates, they went down slightly in August. If you go back even to 2022, the 7520 rate started at 1.6% and ended up at 5.2%. So a lot of these numbers, these percentages will affect the planning. Chris will get into a little discussion about that as well.

All right, so with estate planning and the way the exemptions are currently, I would say it depends on your wealth, and I break it down into estate planning by wealth level, so, again, it depends on the size of your estate, and I break it down like, say, under 10 million, 10 million to 40 million, or ultra high net worth over 40 million. For many, nothing needs to be done because their exemption is below that amount, or it might even be below even if it's sunsets and there's nothing that they need to do or most of their assets are in retirement plans or their homes which they're not willing to give away or can't even afford to give away the exemption amount of 13.61, let alone 27.2 million.

So for the modest wealth, it's just a matter of reviewing your existing plans, your focus might be on income tax planning, taking advantage of the basis step-up by not giving away assets. It's not necessary to give away assets at the moment, again, but you never know. Consider credit or protection review beneficiary designation forms. If you have life insurance, it's always a good time to revisit that, check on that, and also whether you should use a trust. If you have existing documents, just remember that if you have formula planning in your wills and you're setting up a credit shelter trust, it's going to fund that with the current exemption amount of 13.61 million. You basically want to build flexibility into your planning.

For the high net worth, 10 to 40 million, now you're in that spot where currently you have estate tax that will be due upon your death, and the question is what to do about it. And what you want to do is, again, you want to build flexibility into your state planning documents. By now you have to balance between removing assets from your estate and the future appreciation, and locking in today's high exemption amount versus losing that income tax step-up at death, and you also have to consider access to assets and cashflow. Most people in this range will benefit from both income and estate tax planning. And we're going to get into discussion of using both non-grantor and possibly non-grantor trust for this purpose. And, again, at this point, life insurance should be in trust to get it out of your estate.

Now, for the high net worth individual, I would say at this point you definitely want to use the exemption if you haven't used it yet, the use it or lose it exemption, and we'll get into discussion on how to use this. You want to utilize and leverage this increased exemption amount before it sunsets. We're still taking a lack of marketability valuation discounts on assets, or to value assets, limited partnership interest, so a lot of planning will be focused on that. And, again, for most people, there are some quick fixes. If you have loans out to children, you consider forgiving debts to your children, if you have other plans in place like an intentionally defective grantor trust, you might want to clean that up or make additional cash gifts to them to pay so that it can pay down the debt. If you have life insurance trusts that possibly do premiums, maybe you want to clean that up, or visit the life insurance policy to make sure it's not underfunded. And there's also the possibility that if you have as a GST exemption increase to use that for late or missed allocations.

Next we'll get into a discussion on planning with trust and we'll discuss the basic starting out with the dynasty trust, get into spousal lifetime access trust, intentionally defective grant, and then Chris will talk about intentionally defective grantor trust and GRATs, and do a quick revisit with life insurance trust. With dynasty trust, now I'm just getting into the basics of grantor trust or dynasty trust, the benefit is if you give assets now you can benefit multiple generations. None of the assets that are in that trust will ever be included in the grantor state or any of the beneficiaries of state, so the compound of the savings of estate tax can really add up. And if allocated properly, trust distributors are never subject to GST tax. And this could be a grantor trust during the life of the grantor or a non-grantor trust.

And to jus give you an idea how it works and the advantages, because it offers protection. It's not just for estate planning, it offers creditor protection, divorce protection, spend thrift protection, and, again, you can set these up with discretionary payments to the beneficiaries and keep it out of their estates for future generations. And just to show you some of the numbers, and it's just a very simplistic approach that shows that how this trust would grow over the years depending on the growth that's in the trust at the time during the trust term, so you can see it really adds up. So for this, for the high net worth or ultra-high net worth individual, this is a great planning move.

The spousal lifetime access trust, now for those couples that are reluctant to part with the assets, you should consider a spousal lifetime access trust because this gives you the flexibility to give your spouse access and essentially you access to the trust assets in case you ever need them. And it's always the case of donors remorse. So we like this planning move, again, the spousal lifetime access trust, assets that are gifted to the trust grow estate tax-free, the trust is not included in either spouse's estate. So, again, that example I gave earlier, you could name the spouse as a beneficiary, and in case you ever need the money, you thus have access to pay the trust, thus have access to the trust funds. And it's possible for both spouses to fund the trust to fund SLATs, but reciprocal trust must be avoided.

Now, the advantages of using a dynasty grantor SLAT, again, the trust will be a grantor trust for income tax purposes, meaning you're paying the income tax on it is I just listed out 10 possible advantages of using a SLAT. And one is that you could take discounts from minority interest or partial interest in property for lack of marketability and lack of control, and they can range from 25 to 35%. So if you give away a partial interest, you can take a discount, but if you die holding 100 of the asset, there's really no ability to take a discount on that. This is an effective use of lifetime gift tax exemption, again, use it or lose it, all future income and appreciations out of your estate, it provides a layer of protection from creditors, divorce, it provides spend-thrift protection, it could be set up as a dynasty trust so that at death your children or grandchildren or future descendants never pay estate tax.

The trustees can be given discretion to make distributions to the beneficiaries based on their circumstances at the time, so it provides flexibility to distribute to them if needed. If not, keep it out of their estate and it could affect their behavior. As I mentioned, naming a spouse as a beneficiary gives you access to the funds. You can also go from there, you can sell assets to or swap assets out of the trust with no gift or income tax consequences. And, again, another key is that it's a grantor trust that you're paying the income tax on it, which is a huge estate and gift tax benefit because the payment of that income tax is not considered an additional gift. And Chris is going to run through an example on that.

There is one disadvantage to SLAT or making any gift is that the downside is that you lose a step-up in basis that you would've received upon debt. So this needs to be considered as part of your overall plan. But to mitigate that, the trust could have swap powers. This can let you transfer in assets, high basis assets into the trust and swap out low basis assets to get the step-up in basis at death. In other words, you're pulling the low basis asset back into your estate by swapping it out with cash or high basis assets. It must be done during life. Also, funded grantor trust can facilitate these swap sales and possibly joint purchases, maybe let the trust purchase any new investments either with the grantor or on its own.

There are some other issues or considerations with SLATs other than basis. We say estate planning is not always one size fits all, so these are not really consider issues with them, but just things to consider everyone's goals are different. Control, because a lot of times donors are reluctant to give up control. There's investment control, which is easy to do because you can use voting and non-voting shares, there's distribution control that's harder to do. Grants typically can inspire but cannot control fiduciaries, because you can't have too much control otherwise you risk the assets being pulled into your estate. You could make gifts to the trust, again, family limited partnerships or assets that are discountable, taking valuation discounts, or even use formula clauses in case to risk if the asset is ever revalued upon audit. The question arises is what happens upon divorce or death of a spouse?

Divorce, is the spouse removed as a beneficiary and does it stay a grantor trust, or do you toggle off the grantor trust provisions? Some other concerns is a step transaction doctrine. There was a case, I know we've talked about it in previous seminars, Smaldino case where the taxpayers tried to set up basically SLATs for each of them. In this case, the tax court held that the taxpayer never effectively transferred his LLC interest to his wife and therefore it was a gift from him. In other words, Mr. Smaldino made a gift first to his wife, his wife was supposed to set up a SLAT, instead it went directly to the SLAT. So then the next question is do you wait to set up a second SLAT, issue a K-1 to the spouse? During that time, if there's distributions, you should distribute cash to the spouse. Some people think maybe it's a good idea to have one spouse set up a trust in one year and the other spouse set up a trust in another year. We're running out of time to do that because we just have two years left to set up these SLATs.

Now one of the issues for moderate wealth clients is that one SLAT may be used for purposes of the use it or lose an exemption, so that couples with 20 to 40 million... You might not be able to give away 27 million, in which case you should consider one SLAT, have one spouse do it, don't split gifts, and use one exemption, so you're using that bonus exemption. And also one other issue is gift splitting can be tricky, and I'll get into that on the next slide, because the issue is that if gifts splitting is elected, all gifts made that year must be split except those that can't, each spouse is deemed to be a transfer of half the gift. So if spouses elect to split gifts for gift tax purposes, same election applies for GST purposes. And I've done a previous presentation on gift splitting and GST if you want to revisit that, but I don't want to get into too much detail now.

But gift to a trust can be split when the grantor spouse is a beneficiary only to the extent the spouse's interest is both ascertainable at the time of the gift and severable from the interest transferred. I'm getting a little technical here, but most cases, a SLAT, the spouse's interest is completely discretionary and therefore it's not ascertainable, because the gift to the trust cannot be split, the allocation of the GST exemption also cannot be split, so keep that in mind, and the spouse who is the grantor is treated as a transfer for GST purposes. So that's the one that should allocate the GST exemption to the full amount of the gift. Now, you have to be careful, and I especially bring this up because a lot of times trusts have Crummey powers, it gives the spouse and beneficiaries the right to withdraw under the trust. And when this happens, gifts that are subject to Crummey powers are considered gift to Crummey power holders, which can be split for non-spouse beneficiaries.

And if any part of the gift is split, and for GST, each spouse is treated as transfer for one half of the gift, so this can cause a big mismatch between GST that's used and gift tax exemption, in which case, if any part of the gift is split, each spouse would allocate one half of the GST exemption to the gift. So if you are planning on using SLATs and having each spouse set them up, one option would be not to include Crummey powers in the trust or don't split gifts in the year of a gift of the SLAT, because you want to use the grantors exemption anyway. And if spouses do want to split gifts, you can limit the discretionary distribution to the ascertain standard of health education, support, and maintenance, and you could provide that the trustee should first consider spouses other assets.

And, again, I mentioned that if you search on demand on our website, I've done a webinar on this on estate planning in a year of change, got into a lot more detail than that. It gets complicated, but just one thing to be aware of. And this brings us to our next polling question.

Bella:Poll #2

Scott Testa:So I had to bring up a grammar question because I see this all the time and sometimes I see it in emails, and everybody always gets it wrong. I see it more often than not on reality TV, I have to admit I do watch that sometimes, but people always get this wrong because they think it sounds better.

Yes, me is correct. A preposition always takes an object pronoun. Do you know how many times I see this wrong? But always keep that in mind. And from here Chris is going to take over and discuss some additional estate planning moves and its effect on TCJA.

Chris Ryan:Yep. Thanks, Scott. So the next type of trust we're going to discuss is the intentionally defective grantor trust or the IDGT for short. And this really covers a broad category when it comes to trusts because there's several more specific types of trusts that fall under this definition of IDGT. So an IDGT is a type of trust where the assets in the trust are removed from the grantor's estate, but all of the income earned by the trust is taxed to the grantor because the trust is defective for income tax purposes. So not defective as in broken, defective as in the inconsistency between estate tax treatment and income tax treatment. And how we get assets into this type of trust can either be by gift, sale, or both.

So here we have an illustration of how an IDGT would typically work. Grantor can gift property to the trust or grantor can sell property to the trust in exchange for cash proceeds or an installment note where cash is received over a period of years. Either way, once the property is in the trust, the trust provision set forth who the beneficiaries are, children, grandchildren, future generations, what type of distributions they can receive, whether discretionary, mandatory, income, and or principle. And if drafted properly, assets in the trust are not only outside of the grantor's estate but they're also outside of the estates of the beneficiaries. So when it comes to determining how we want to fund an IDGT, it typically comes down to how much exemption does a taxpayer have left.

If a taxpayer has sufficient lifetime exemption remaining, a gift to an IDGT should be considered to utilize the remaining exemption before it's potentially cut in half after December 31st, 2025. So any exemption available to a taxpayer now over the amount that it may be reduced to in 2026 which is not used would be lost. It's that use it or lose it concept that Scott discussed. So if a taxpayer has enough assets where they're comfortable with parting with them to use this bonus exemption, we would look to make a gift. On the other hand, if a taxpayer has little or no exemption remaining because they've already used their exemption on prior gifts, we may look to having a sale to the IDGT. So while the value of the assets sold will still be included in the grantor's estate, because the grantor is receiving cash in exchange for the sale or an installment note in exchange for the sale, it's that growth that we're removing from the estate.

If a sale is made to an IDGT, it's extremely important to properly detail the sale and follow all the terms of the sale. This includes things like obtaining a valuation for assets gifted to the trust. How will we know that we've set a proper sale price without a valuation? It includes drafting assignment documents. What specifically is the grantor transferring to the trust? It includes drafting purchase agreements, what will be exchanged for that sale. And in the case of a sale for an installment note, we want to have a promissory note in place setting forth what type of payments are required. Are we making interest only payments with a balloon payment? Are they principal and interest payments? Are the payments to be made annually, semi-annually, quarterly, or monthly? And what is the interest rate in place at the time of the sale based on all of these factors? And that rate is set by the IRS. The risk with not documenting a sale properly is that the IRS can challenge it and potentially consider it as a gift as of the date of the sale.

Even if we do properly follow all the terms of the sale and properly document it, the IRS can still come back in later on and potentially revalue the assets that were sold. If they redetermined the value to be larger than what they were sold for, that excess over the sale price would be considered a gift. So how we limit the IRS's ability to do this is by actually filing a gift tax return even if there's no gift involved. So the reason for this is because a sale from a grantor to a grantor trust, which an IDGT is a grantor trust, that sale is not reported anywhere on any income tax return or anywhere else to the IRS.

The only place it would be reported is on a gift tax return. And by doing that we force the statute of limitations to begin to run, meaning the IRS only has three years from that point to come in and challenge the value of the sale or the value of the property sold. If we don't report this on a gift tax return, that statute never begins to run, the IRS can come in at any time in the future and challenge the value. It may not come up until a taxpayer actually passes away and there's an estate tax return filing requirement, but in that situation that could be decades in the future. And just imagine the pain of having to go back 20, 30 years and getting a proper valuation done, you may just be at the IRS's mercy in that case.

Next type of trust I want to talk about is the grantor retained annuity trust, or GRAT for short. So GRATs are a type of trust where a grantor contributes assets to the trust and receives an annuity back from the trust over a term of years. And the annuity term can be flexible, but it's generally anywhere from two years to 20 years. A longer term allows for a lower required annuity payment, but we do run the risk that if a grantor dies during that annuity term, there's a clawback of assets that are pulled back from the GRAT into the grantor's estate. So there's risk with a longer term, but the benefit is that we have a lower annuity payment required.

The annuity can also be structured to increase by as much as 20% each year. So this allows for less cashflow need early on and it allows for more time for the property that's in the trust to grow and compound, leaving more property for the remainder beneficiaries, giving us an even bigger estate tax savings or estate tax benefit. Once the annuity term expires and if the grantor has exceeded or has outlived the annuity term, the remaining property and trust is then transferred outright to the remainder beneficiaries or held in further trust depending on how the trust agreement is drafted.

So GRATs are ideal for a taxpayer with little or no exempt remaining, especially if they own assets with potential for high appreciation. GRATs can be set up as what's called a zeroed-out GRAT, meaning no lifetime exemption is used on the gift because the entire value of the initial contribution plus interest is returned to the grantor. So the logical next thought is what's the point of contributing property to a GRAT when everything is coming back to the grantor anyway? But this is what's known as an estate tax freeze. We're freezing the value that's ultimately included in the grantor's estate as of the date of the gift because we're locking in the value as of the date of the gift. But, again, it's just like a sale to an IDGT, it's the growth that we're removing from the estate. So that's why assets with potential for high appreciation are best for grads even in today's high interest rate environment. So if we look at the required interest payment as our hurdle rate, the current interest rate that a GRAT is required to pay is 5.4% if funded in July of 2024.

If the property in the GRAT exceeds that rate, the excess earned over that rate is what will be transferred to the remainder beneficiary's estate and gift tax-free. If we don't exceed that interest rate, there's no tax or penalty, it just means the GRAT has failed, everything ends up returned to the grantor as if nothing took place, there's nothing remaining for the remainder beneficiaries. But that's why, like I said, even today in a high interest rate environment we're looking for rapidly appreciating assets to be put into a GRAT. We're not looking for something that's only going to earn 5%, 10%, 20% or even more over the term of the annuity.

And just like with sales to IDGTs, it's extremely important that we follow the provisions of a GRAT agreement. So there's specific rules for annuity payments from GRATs. Payments have to be made within 105 days of when they're due, so that's typically on the anniversary of the GRAT creation date you have 105 days from that date to make the annuity payment. And loans cannot be made from the grant to satisfy an annuity payment, there has to be an actual payment of that annuity, and that can be done with cash or non-cash property. So in the case where we have to distribute non-cash property because there's just not enough cash in the trust, we can return shares of stock or closely held business interests from the GRAT to the grantor, but we have to keep in mind we are removing some of the estate tax benefit by doing that, because the point of putting this property into the GRAT is removing the growth from the estate.

If we return some of those shares or interests, we're pulling back some of that growth into the estate, but it does allow for flexibility when cashflow is a concern. And the risk with not following the provisions of the GRAT specifically with not making timely payments, the IRS can come in and say this whole transaction was a gift on day one, completely defeating the purpose of setting up the GRAT. So we discussed earlier that an IDGT is defective for income tax purposes, meaning it's excluded from the grantor's estate, but the grantor still pays tax on the income earned by the trust. But believe it or not, this is actually an extremely powerful estate planning tool because we're allowing the property in the trust to grow income tax-free, leaving more assets for the trust beneficiaries. So generally when you pay expenses including income taxes on someone else's behalf, these are considered gifts, but income taxes paid by a grantor for a grantor trust are not considered gifts. So we're essentially making gift tax-free payments to the beneficiaries for the income tax.

We also still have the ability to make annual exclusion gifts to those beneficiaries because we haven't used any on these income tax payments. So looking at an example, we have a grantor who pays $50,000 per year in income taxes for 10 years, there's a cash outlay of $500,000 over those 10 years and this strategy would save over $200,000 in federal estate taxes, not accounting for any sort of growth. Had these taxes not been paid by the grantor, the value of the estate would be at least $500,000 larger subject to an estate federal estate tax rate of 40% resulting in $200,000 of federal estate taxes. And to illustrate that, and this time with growth factored in, looking at our example of $50,000 paid over the course of 10 years, there was a cash outlay of 500,000. If that cash remained in the estate and grew only 5% per year for those 10 years, it would've grown to about $629,000 and it would've been subject to estate tax of just over $250,000. And of course with better growth and more of a time horizon, those estate tax savings only increase.

But can this tax burden be too much of a good thing? So we have to be careful with cashflow planning to not put too much of a grantors assets into the trust, leaving an insufficient amount to cover the income taxes. We have to consider things like is the grantor going to continue generating income on his or her either through employment or investments remaining in his or her name. One way to help with this is to name the spouse as a beneficiary of the trust, which allows for indirect access to the trust assets for the grantor without causing estate inclusion. And we can also include what's called a tax reimbursement clause in the trust agreement, which allows for the trust to reimburse the grantor for income taxes paid on behalf of the trust. So we don't want to rely on this because then we're losing the estate tax benefit, but this does allow for some flexibility with cashflow planning.

The final type of trust I wanted to discuss is the irrevocable life insurance trust or the ILIT. So this is a trust that owns insurance on the life of the grantor. And if an individual owns insurance in his or her own name, the face value of that policy is includable in that person's estate upon their death. When an insurance policy is in an ILIT, we remove that asset from the estate. In the case of an existing policy that's put into the trust that the grantor has to survive three years after the transfer and as long as the grantor has no incidents of ownership, that policy is effectively removed from the grantor's estate. And while the grantor is alive, there's typically no income tax filing requirement because the only asset that should be in this trust during the grantor's life is the life insurance policy, and the dividends that are earned on that policy are not subject to income tax.

We do have to consider though that premium payments made by the grantor or cash contributed to the trust to cover premium payments are considered gifts from the grantor to the trust. So we may have a gift tax return requirement each year depending on how the trust agreement is drafted and the size of the premium payments. Upon the death of the grantor, the ILIT receives the insurance proceeds and either continues in further trust for the benefit of the descendants or is distributed outright or may be used to pay the estate tax owed upon the death of the grantor.

And so to quickly illustrate this, we have a grantor who contributes cash each year to the ILIT to cover insurance premiums. The ILIT then turns and pays those premiums on the policy. And upon the death of the grantor, the ILIT collects the proceeds from that policy. From that point, like I said, the trust can either continue for children and future generations, and distributions can be discretionary or mandatory, can be income or principal. And the assets inside of this trust, again, are not only removed from the grantor's estate but are also outside of the beneficiary's estates. And we have our third polling question.

Bella:Poll #3

Chris Ryan:Question came in, what makes A IDGT defective? Defective refers to the mismatch in treatment between estate tax and income tax. It's defective in that it's excluded from the grantor's estate but the income earned by the trust is included on the grantor's personal tax return.

Chris Ryan:And there's a couple of questions regarding insurance policies for ILITs. An ILIT can hold either a term policy or a whole life policy. Of course, with the term policy you have lower premium payments, there's less of a gift that's made each year. Whole life policy, you have a larger premium payment, there's more of a gift, but that's all part of the planning too. All right. And I'll hand it over to Lisa.

Lisa Herzer:Thanks, Chris. So we're going to switch gears now and focus on income tax as opposed to estate tax under TCJA. I can't believe that it's been, I guess, seven years. I remember when it first came and all the planning related to TCJA, and now we're working backwards. So the act limited certain deductions for income tax purposes under TCJA. The big one, of course, being the SALT deduction, and state income tax and real estate taxes being limited to $10,000. In the New Jersey and New York area, of course, real estate taxes are much higher so it significantly infected the tax deduction related to the state and local taxes. The same was true for trusts. And I have trust income tax planning, but really for estate income tax planning as well, limited it to $10,000 as well.

The deduction for miscellaneous itemized deductions were suspended under TCJA and I remember that first year a lot of simple trusts, all of a sudden, all the income wasn't being distributed out because of the difference between fiduciary accounting income and taxable income, and they're wound up being tax paid by the trust itself in that first year. And that was a little bit of surprise to some people. However, tax preparation fees which are no longer deductible by individuals have remained deductible by trusts and estates. The other income tax item was the QBI, qualified business income, deduction, that 20% deduction under 199A, that applies to trusts as well as individuals, and that was a change that was added with TCJA and will be going away if in fact it does sunset.

One of the planning areas that we do all the time, and it's both with TCJA and without, but I think maybe in that year when it's supposed to sunset we'll probably be seeing a lot more, is the 65-day rule where you can make a 663(b) election. And what that does is, say, after year-end you're allowed within 65 days to distribute to beneficiaries and elect to have it count for the year before. So what you'll be able to see is where does the beneficiary stand in terms of tax rates and where is the trust in terms of tax rates and which would provide a lower overall tax liability. So if, let's say, the sunset happens and income tax rates will increase, we'll be seeing more of in 2025 accelerating income into that year when the rates are lower as opposed to 2026 when they're due to increase. So on this slide, because it was prepared before this weekend, I have some of the budget proposals and I have the Biden, which now will change.

However, I do believe that, and we had talked about changing the slide, but they're probably going to remain the same under the current vice president, and Trump's proposals, which haven't been extensive, quite honestly. So the Biden proposals are to increase the income tax rate, drop the estate tax exemption to the pre-TCJA level, which would mean it would be allowed to expire. The other new thought is that they will be taxing unrealized capital gains at death. Right now they show a $5 million exclusion for estates that are under fie million it wouldn't happen, but they won't allow those untaxed capital gains to happen at death. Another proposal was to cap the annual exclusion gifts to $50,000. So it's currently 18,000 per donee. They would say, "Okay, you're only allowed to gift up to $50,000 and then you eat into your exemption." GRATs, Chris just talked about GRATs, which are a great estate tax planning tool, which is why they have been a subject of the proposals by the Democrats, so they would not allow any more zeroed out grants.

The minimum value would be 25% and the minimum term 10 years. Chris talked about the two-year GRATs or a 10-year GRAT and the difference in the annuity they would have to have a minimum term of 10 years. The biggie, again, payment of income taxes is a gift. Right now he just showed you the example of the tax burn and how beneficial it is. However, if the donor did continue to pay income tax for the GRAT, that would be considered a gift. They would reduce or eliminate valuation discounts for transfers of interest between family members, and sale or swaps to grantor trust are treated as taxable events. Under Trump, he would extend the expiring TCJA provisions, the higher estate tax exemption would remain, and then what additional tax cuts, there's been a lot of discussion about not taxing wages... I'm sorry, not wages. Tips. But there hasn't been a lot else in Trump's proposals. The other item that I wanted to talk about, which isn't on the slide but has recently garnered significant attention in media, is Project 2025. And that's basically a blueprint for the next Republican presidency, and there's a lot in there.

And if you're interested I would just say Google it and you'll be able to find a lot more about it. But I just wanted to touch on some of the income tax and estate tax provisions that are in there. And, again, this is just what they see, the Republicans, as a blueprint for what should happen in the first 180 days. But depending on who gets into office, it could be meaningless. And honestly, Trump has distanced himself from Project 2025. So even if Trump won, I'm not sure some of these would make its way into law. But they want to simplify the tax code by having a two rate tax system of 15% and 30% and eliminate most deductions in credits and exclusions, a top corporate income tax rate of 18%, and they want to reduce, which hasn't been discussed previously at all, the estate and gift tax rate to 20% and leave the exemption at the current increased rate. So that's just the Project 2025 items.

A couple of other considerations. SECURE Act made some changes to the way that beneficiaries are allowed to withdraw from inherited IRAs. The big one being that there's no longer a stretch allowed unless you're a spouse or an eligible designated beneficiary. If you're not either of those, then you need to withdraw the IRA within 10 years of the individual's debt. So it used to be you'd leave it to your child and they were then allowed to stretch it out over their lifespan. That is no longer the case. There were some regulations that were issued last week and the big one that in the final regulations were that they confirmed that if individual had started taking their distributions, then the beneficiary had to continue taking those distributions at least as rapidly as the individual that owned the IRA, and a complete distribution must be made by the end of the period as modified by the SECURE Act.

So there was some confusion about whether you could just wait and take everything out at the end of the 10th year, and they have clarified that as not the case. I know that... And this relates both to income tax planning and estate tax planning, is that maybe consider some beneficiary changes to your IRA. So in other words, you're giving right now in your will $100,000 to a charity, consider perhaps giving the IRA to the charity, and this way then they don't pay any tax on it, your beneficiaries receive the other 100,000 you would've given them, receive a step-up in basis, and income tax wise it makes more sense. So this is our last polling question.

Bella:Poll #4

Scott Testa:Just to go over some questions that are showing up in the Q&A, if I may. I rushed into it, talked about dynasty trust and then SLATs, but a SLAT is a dynasty trust with a spouse's beneficiary essentially, they could be one and the same, but a dynasty trust doesn't have to have a spouse as a beneficiary. A trust is also grantor typically if a spouse is beneficiary, where a dynasty trust doesn't have to be a grantor trust, but we like the tax burn of the grantor trust.

Lisa Herzer:Great.

Lisa Herzer:There was a correct answer. So a beneficiary spouse is not required to withdraw the inherited IRA account balance within 10 years. It's one of the exemptions from that 10 year rule for the spouse. So the other questions that came in related to some of the things about the Biden proposals and Project 2025, I just want to say the Biden proposals are just that, they're simply proposals, and anything would need to pass congress before it became law. And I think I also mentioned there were a couple of questions about Project 2025, this is just a Republican think tank and Trump has said he's not involved with it, but, again, just something to consider.

Scott Testa:And we do have a couple of minutes left. We're also getting questions about what makes a trust a grantor trust? And there's certain income tax provisions that makes a trust a grantor trust that might not apply for state or gift tax purposes, which is why they're defective. A power to substitute assets makes a trust a grantor trust or anytime you have a spouse is a beneficiary makes it a grantor trust. There's certain provisions that make a trust a grantor trust, but it's not a completed gift like a power to revoke or the right to income, so it does get a little complicated. So if you want a trust that's a grantor trust, the typical provision is the power to substitute assets or spouses of beneficiary. One of the other questions is whether there's a step-up in basis upon death for gifts that are to a defective grantor trust.

And the IRS clarified this, they said that, no, you don't get a step-up, although there's some authorities that think you should still get a step-up in basis, although most accountants in the industry disagree with that. But anytime you make a completed gift, typically you would not get a step-up in basis, so that's the downside. I think that takes us to our time. And it's hard to answer the questions in the chat, these little boxes they give us, so if there's any follow-up needed, please email us and let us know.

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