The House Ways and Means committee released tax proposals in mid-September that will require Democrats to largely act in concert to get passed. Many of these proposals, if made law, would have an impact on our private clients. We don’t know if this new tax legislation will pass or what its final form will be if it does. So, we are focused on identifying the most appropriate arrangements and strategies for our clients that can be implemented quickly and with minimal downside risk if the final version of the legislation is different from what is currently proposed.

With these principles in mind, here are some strategies we believe our clients should consider now, before a final bill is passed:

  1. Create Access to Cash. Some planning strategies you’ll should/could consider may require cash, like “freezing” an existing GRAT or prefunding insurance premiums (discussed below). Creating a line of credit, secured by your portfolio, may be an easy way to access liquidity on short-notice.
  2. Use the Augmented Exemption. The proposed bill would cut the gift and estate tax exemption (currently, $11.7 million) in half by year-end. Therefore, high net worth clients who are willing and able to give up direct access to this amount of assets should make gifts to use their augmented exemption before December 31. Such a gift may avoid a 40% estate tax on the $11.7 million of gifted assets and on the post-gift appreciation of those assets. Keep in mind that even if the estate tax “sunset” fails to make the final version of this bill, that sunset will occur automatically at the end of 2025, so making a gift now helps accelerates planning that many clients need to carry out regardless of the current legislative process.
  3. Create a Grantor Trust. “Intentionally defective grantor trusts” are trusts where the creator of the trust (the “grantor”) is treated as the owner of the trust for income tax purposes, but not for estate or gift tax purposes. This unique tax status can provides many benefits, and grantor trusts have been a cornerstone of wealth transfer planning for decades. The current tax proposal would effectively eliminate the tax advantages of grantor trusts created after enactment, and therefore clients who do not already have a grantor trust in place should consider executing one now, before enactment of the new law, in order to have a grandfathered grantor trust for planning purposes. Even if you can't (or won’t) fund it with the full exemption amount, some funding is helpful. It could provide funds for the subsequent acquisition of life insurance, which may be valuable if the new grantor trust rules limit the utility of irrevocable life insurance trusts in the future, and such life insurance might be particularly valuable for younger clients or entrepreneurs as a hedge against future estate tax liability. Funding a grantor trust could also provide sufficient capital to support an intra-family loan or similar planning strategy with the trust. In short, a funded grantor trust provides options and flexibility, with little or no downside, should the law not change.
  4. Prefund Life Insurance Premiums. Consider prefunding premiums on insurance policies held in existing (grandfathered) irrevocable life insurance trusts (ILIT). Post-enactment gifts to a grantor ILIT (which includes all ILITs with a spouse as a beneficiary, and probably includes all ILITs producing income) would cause partial estate tax inclusion under the proposed new law. Prior to enactment, clients with these insurance trusts should consider pre-funding future premiums with an additional gift to the trust. If you have unused exemptions, consider pre-funding all remaining premium payments. All clients with grantor ILITs may want to consider at least one to two years of premium pre-funding to buy some time, and provide some optionality, as the law develops. If the law doesn’t change, little is should be lost as the payments would have to be made at some point.
  5. Freeze Existing GRATs. Consideration should be given to a full or partial freezing of existing grantor retained annuity trusts (GRATs). If a GRAT holds low basis assets, and those assets will be used to pay the annuity to the grantor in the future, post-enactment transfers could be a gain recognition event and create a substantial and unanticipated tax liability. Consider freezing existing GRATs now by substituting high basis assets (cash, bonds, or a promissory note). If the law doesn’t change, you can roll the low basis security into a new GRAT and continue with a typical GRAT strategy.
  6. Consider Long-Term GRATs, Now. Consider creating long-term GRATS before enactment. If this bill passes, it will end the utility of GRATS, so this may be the last chance to create one. Given the ability to lock-in a very low discount rate, a GRAT with a 7-10 year term may be a good option. This is particularly true for younger clients whose mortality risk is low. The GRAT could be funded, in part, with sufficient liquid, high-basis assets to cover several years of annuity payments (to avoid or minimize gain recognition on the annuity payments), and could use a “shark fin” structure, where the annuity increases by 20% each year, to help minimize the required annuity payments in the early years.

Each client situation is unique and requires a customized approach. We hope this serves as useful guide on some clear, actionable suggestions, in this time of uncertainty.

To discuss this tax legislation further, please reach out to your Brown Advisory Client team
or contact us.  






The views expressed are those of Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be and should not be relied upon as investment advice and are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of future performance and you may not get back the amount invested.

The information provided in this material is not intended to be and should not be considered to be a recommendation or suggestion to engage in or refrain from a particular course of action or to make or hold a particular investment or pursue a particular investment strategy, including whether or not to buy, sell, or hold any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. To the extent specific securities are mentioned, they have been selected by the author on an objective basis to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. This piece is intended solely for our clients and prospective clients, is for informational purposes only, and is not individually tailored for or directed to any particular client or prospective client.

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.