Wealth Matters for Dentists

ArticleTrusts: How Can They Protect You Against Future Cuts in Estate-Tax Exemptions?



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Due to the overwhelming response of our webinar on estate planning and proposed legislation on June 4th with the New York State Dental Association (NYSDA), we at Altfest Personal Wealth Management are issuing a three part series to help you understand potential changes and evaluate your estate planning.  This is the second article in that series.

By Andrew Altfest & Mike Prendergast

Drastic changes to estate and gift-tax exemptions under consideration in Congress make it essential for dentists expecting to leave substantial assets upon death to prepare now to transfer them out of their estate.

We at Altfest Personal Wealth Management would like to recommend some actions you can consider to make this strategic shift during 2021. The For the 99.5% Act, for example, seeks to more than halve federal estate tax exclusions from the current $11.7 million allowed for individuals, so Americans with estates valued at even a few million dollars — especially those who expect to be high-earners in the future — are as threatened by this potential legislation as the ultra-wealthy are.

Another bill in Congress, the “Sensible Taxation and Equity Promotion” (STEP) Act, goes after the assets of the affluent even more aggressively. The proposal imposes capital-gains tax at death on inherited assets, transfers to trusts and more. If passed, the changes could disrupt all future estate planning, and may apply retroactively to transfers of appreciated assets made as of Jan. 1, 2021. In addition, the STEP Act allows the non-taxable transfer of only up to $1 million of unrealized capital gains — over one’s lifetime and at death.

Grantor Retained Annuity Trusts

One way to protect your assets is through grantor retained annuity trusts (GRATs), which are irrevocable, short-term trusts that allow someone to make lifetime gifts of appreciating assets to beneficiaries with little or no gift- or estate-tax consequences.

The creator, or grantor, retains the right to receive an annuity stream during the trust’s term. At the end of the term, any remaining assets (beyond those agreed to be paid back to the grantor) are distributed to noncharitable beneficiaries — typically, the grantor’s children. However, the opportunity for this estate-planning technique sanctioned by the Internal Revenue Code may end soon or be severely restricted.

Specifically, the 99.5% Act, put forth by Sen. Bernie Sanders (D.-Vt), proposes these significant GRAT changes:

  • A minimum 10-year term, rather than shorter arrangements, such as two years, which are popular now. This would increase the mortality risk for the GRAT’s often-elderly creator (i.e. if the grantor dies before the term of the GRAT ends, all the assets in the GRAT revert back to the grantor’s estate.
  • A required taxable gift of at least 25% of the value of the property being used to fund the GRAT. This would disallow a GRAT from being structured as “zeroed-out” (as is currently allowed), preventing the contribution to the GRAT from being entirely gift-tax-free.
  • A maximum GRAT duration of the life expectancy of the owner plus 10 years; currently, there is no limit to the trust’s term.

An Altfest advisor can analyze your financial situation and educate you about planning strategies.

Spousal Lifetime Access Trust

Another option to think about in light of proposed tax-law changes and the 2025 sunset of the favorable estate-tax exclusions brought about by the 2017 Tax Cuts and Jobs Act (TCJA) is a spousal lifetime access trust, or SLAT.

This vehicle allows an individual to create a lifetime trust for a spouse, fund it with as much of the federal transfer tax exclusion amount as desired and not elect to take the marital deduction. This strategy will use the transferor-donor’s gift tax exclusion while it remains available, and protect it, should the exclusion be reduced in subsequent years. If the donee spouse is given a life estate in the trust (in other words, the right to the trust income and the opportunity to receive trust principal at the discretion of the trustee) the trust property will not be taxed upon the death of the donee spouse.

Valuation Discounts

Bills in Congress also take aim at so-called valuation discounts on “non-business assets” you may gift to family members, effectively eliminating them in most situations. These discounts have been granted, generally, when someone gives away a fractional interest in an asset, usually to a child, and is allowed to account for the inability to sell or exercise any control over the interests. In other words, owning a one-quarter interest in an asset is not the same as owning 25% of the gross value of the asset.

There are two broad discounts available to be claimed to reduce the value of property from its fair market value to its discounted value: minority interest and lack of marketability. Such discounting has been appropriately used in significant ways in tax planning, but the 99.5% Act would erase this beneficial option. The Sanders proposal says that if you have non-business assets and you’re not actively involved with running them, they (think rental investment properties, stocks, etc.) are passive assets, so you aren’t eligible for a discounted valuation when gifting a portion of these assets. This is a very big, and potentially painful, change to current law.

As a result, Altfest suggests dentists consider taking advantage of valuation discounts for transfers of minority interests in real estate or passively owned business holdings now, before they are possibly disallowed.


On the positive side, the notion of “portability,” or the ability of a surviving spouse to safeguard the first deceased spouse’s estate-tax exemption, is retained in proposed legislation aiming to increase taxes on bigger estates and gifts. The 99.5% Act proposal, for one, continues to allow portability of any unused applicable exclusion amount, known as the “DSUE amount,” for a surviving spouse of someone who dies after 2010. The surviving spouse can use this amount for lifetime gifts or it can be put toward estate taxes when he or she subsequently dies. Bear in mind that in order for portability to be available, a federal estate tax return must be filed for the estate of the deceased spouse.

QTIP Trusts

As part of the portability imperative, it’s crucial to leave property to the survivor outright, or in a qualified terminable interest property, or QTIP, trust. This should allow for a basis step-up to current market value (if still allowed) for the property of the first decedent when the survivor dies.

The tax burden of a large inheritance is usually eased by using the higher, or “stepped-up” current market value of the asset at the time of inheritance for income tax purposes to minimize the beneficiary’s capital-gains tax bill. If some of the changes under consideration in Congress now become law, this provision also could disappear.

Speak with a Financial Professional

Planning for the proposed changes from Congress and how they might affect your estate, large gifts and taxes can be overwhelming. Look to Altfest for help in understanding the benefits of a new estate plan in accordance with the new legislation to help shape and realize financial goals. Schedule a complimentary consultation with Altfest.

Disclaimer: Information provided is for educational purposes. Altfest does not provide tax, legal, or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions. Further, your advisor makes no warranties with regard to such information or a result obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.



Investment advisory services provided by Altfest Personal Wealth Management (“APWM”). All written content on this site is for information purposes only. Opinions expressed herein are solely those of APWM, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.

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