Mean Ways and Means – Last-Minute Taxation Changes Upend Estate Planners and Clients

Mean Ways and Means – Last-Minute Taxation Changes Upend Estate Planners and Clients

Taxes are like dentistry.

I don’t hear any dissent.

The news from the checkup sometimes isn’t so grand: you need a filling, even a root canal. What can you say? Doing nothing is worse than the drill, that’s for sure.

Taxes are like that: things need to be fixed, bought or paid off. The government needs money – what should they do, just print it? Don’t cut wise with me, now.

OK, we can take it, both kinds of pain – if there’s no other way. But imagine, settling back in the chair, the white coat approaches, ready to grind – and grinning, says: ‘Sorry, out of novacain’. Why, you’d think it a plumb dirty trick.

Congress recently pulled such a stunt on estate planners and customers.

On Capitol Hill, they’re working overtime on a robust tax plan – $2.1 trillion in new levies at last accounting. A special class of taxpayers, the wealthier ones, will soon be hanging high, so to speak. The way things are nowadays, they can be glad it’s just figurative.

I suppose they can take it. They have crack advisory teams who, while they can’t make the pain all go away, can dull the ache. It’s a tough job, what these advisors do; you must be born to it, I think. Just hearing them rap on about exemptions and exclusions, clawbacks and step-ups, tax basis and dynasty cases – makes my liberal arts heart skip a beat.

They can handle most anything with one requirement: planners need to know precisely how the wind blows. The sections and subparts, clauses and provisions of tax law and tables. If they know surely, they can plan soundly, and their clients can sleep just so. Throw in a curveball and the bat freezes in their hands. Their game is predictability; without it, they’re batting for Mudville.

Here’s what Congress did to them. I mean the Democratic majority, via the House Ways & Means Committee, which drew up the slew of tax increase ideas. I avoid partisanship, but that’s how the ball flies. They rule the roost; they take the heat.

It’s OK to raise taxes – there, I’ve said it; hope I still have a job. But we need to know everything, the last jot and tittle, so we can prepare. Today’s topic of note: irrevocable trusts or Defective Grantor Trusts (DGT), as they’re known in the biz. A keystone of estate planning for the wealthy, Democrats don’t like them, so they’re set to fall soon. Mind where you stand.

We’ve known this was coming for some time and estate advisors have had plenty of notice to whip up new strategies, call in clients, line them up six feet apart, and get down to the heavy shifting. Dish it out, we can take it, they thought.

Then, Ways & Means whipped in a spitball. Advisors and rich clients were working hard at establishing new trusts, and funding and rejuggling established vehicles to beat the deadline. They thought, based on reports from Capitol Hill, that whenever the new tax law is enacted, the DGTs would be ‘grandfathered’ into the new era, with their current tax and inheritance advantages intact. They were wrong on this point, it turns out.

We thought DGT holders would be able to swap or buy assets, exchange this-and-that for promissory notes without hindrance or tax in perpetuity. Ways & Means, in its report of September 28, admitted that its original proposal as published said just as much – but that draft had misspoken. The novacain tank was empty, as it were.

The committee’s actual intent was this: once their proposal is enacted, sales or exchanges in DGTs will be fully taxable. Irrevocable trusts are complex, but essentially, they are structured to record asset exchanges as taking place between me and myself. Once the new rules become law, these exchanges will be treated as if taking place between two separate parties – and become taxable as such.

Nearly every wealthy family has an irrevocable trust. Grantor Retained Annuity Trusts or GRATSs, for example, have been golden companions for ages. At Congress’s will, the GRATS’s regal head is now set for the axe.

There is still time – just a bit. Despite their majority, Congressional Democrats are hogtied by intraclan wrangling: the left radicals want to squeeze more revenue out of the rich; moderates, who don’t like to scare voters, are fine with two trillion; a few mavericks think Budget 2022 is swollen with pork fat and needs a close trim. Passage could come any day now, any day…

Will this house of cards fall quickly or stand up to the stiff autumn breeze? Sure, there is still time for prosperous taxpayers to meet with their planners, and insulate their estates for a long, frozen winter. I hope the advisors can find time in their packed schedules, because the lines – clients six feet apart – are already long. I can only wish you good luck, pronto.

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