Bobby Bonilla Day, and the Power of Deferred Income Annuities

Any friend of the firm who has received one of our monogrammed‐logo baseballs can probably attest to the importance of America’s national pastime to the PRW team. Two team members hold the distinction of having been drafted by professional baseball organizations (Rick Renwick, CUBS 1979 and Ted Dziuba, METS 2006) prior to their careers in Finance, and although an unfortunate number of Yankee fans roam the halls of Suite 502, it has made for a healthy rivalry around our Boston‐area office with all of the Red Sox faithful on staff.

 

It is with this fervor for the game of baseball (and for sound, financial planning) that PRW celebrates Bobby Bonilla Day every July 1st!

 

Who is Bobby Bonilla and what is Bobby Bonilla day?

 

Bobby Bonilla was a 6‐time Major League All‐Star and 1997 World Series Champion who played for 9 different teams across a successful 16‐year career in the big leagues. His name is familiar to many outside of the game of baseball because of some savvy financial planning that he implemented when he was released by the New York Mets in 1999. Still owed $5.9 Million on his contract with the Mets, an agreement was made to defer that payment for 10 years, with an agreed‐upon annual interest rate of 8%. Mr. Bonilla’s eventual payout would grow to $29.8 Million, which was annuitized to provide annual payments of $1.19 Million per year for the next 25 years.

 

Although he retired nearly 21 years ago, every single July 1st through the year 2035, Bobby Bonilla will receive a $1.19M check from the New York Mets. All because of a $5.9M contractual obligation from 21 years ago!

 

Not only does this speak to the guidance of his agent and investment advisor, but it is a powerful endorsement of the fixed annuity as an investment vehicle to create a secure stream of income. A fixed annuity is most similar to a Certificate of Deposit (CD) that is offered by a bank or other‐FDIC insured institution, except that it is offered by an insurance company. Unlike a CD the income is deferred until you start withdrawing from the product and does not need to be reported in your taxes until that time. In addition to providing a guaranteed rate of return for the investment term, fixed annuities, and all annuities, give you the opportunity to turn those savings into lifelong pension‐like income. The fixed annuity guarantee is backed by the financial strength of the insurance company, which is best understood through its financial rating.

 

This is an example of the many tools that PRW may consider when we consider the best way to help our clients reach
their goals.

 

We hope you and your families are well and enjoy Bobby Bonilla day!

 

PRW Wealth Management LLC
Clarity for the Present  Vision for the Future

 

 

1 Pine Hill Drive, Suite 502
Quincy, MA 02169-7400
P:(617)745-0900
F:(617)745-0910
www.prwwealthmanagement.com

 

PRW Wealth Management LLC is a registered investment advisor (“RIA”) with the U.S. Securities and Exchange Commission (“SEC”). Investment Advisor Representatives offer financial advice through PRW Wealth Management, LLC. Registered Representatives offer securities through Lion Street Financial, LLC; member FINRA/SIPC. PRW Wealth Management, LLC and Lion Street Financial, LLC are not affiliated. PRW Wealth Management, LLC and Lion Street Financial, LLC do not provide legal or tax advice and are not Certified Public Accounting (CPA) firms. Trading instructions sent via email may not be honored. Please contact my office at (617)745-0900 for all buy/sell orders. Please be advised that communications regarding trades in your account are for informational purposes only. You should continue to rely on confirmations and statements received from the custodian(s) of your assets.

 

** CONFIDENTIAL: This communication, including attachments, is intended only for the exclusive use of addressee and may contain proprietary, confidential and/or privileged information. If you are not the intended recipient, you are hereby notified that you have received this document in error, and any use, review, copying, disclosure, dissemination or distribution is strictly prohibited. If you are not the intended recipient, please notify the sender immediately by return email, delete this communication and destroy any and all copies of the communication. **

WHOLE LOTTA CONGRESSIONAL TAX LEGISLATION’ GOING’ ON

President Biden took office advocating numerous tax law changes. Now that Democrats hold a slim margin in Congress, change is in the air, and several Democratic legislators have introduced bills focused on estate and gift taxes. These include the tax reform bill sponsored by Senators Bernie Sanders (D-VT) and Sheldon Whitehouse (D-RI), “For the 99.5% Act.” It has generated a lot of press coverage and caused ripples in the estate and tax planning world.
PRW’s Estate and Wealth Management Counsel, Janice Forgays, serves on the National Tax Committee of FINSECA, a financial services advocacy organization. In this message, Janice summarizes the various tax law changes offered in the “For the 99.5% Act” along with Senators Chris Van Hollen’s and Ron Wyden’s tax bills. She provides her planning recommendations based upon the provisions in the bills and information shared with the Tax Committee by the FINSECA Congressional Lobbyist, Jeff Ricchetti.

It is extremely important to understand what has been proposed but perhaps more important to recognize that these proposals are not law and there are certainly no guarantees of passage even with presumptive Democratic control in Congress. Planners and clients are best served by not overreacting and making significant planning changes before we have a much better indication of where these proposals are headed. Here is a summary of the tax bills introduced so far:
For the 99.5% Act

I. The Gift, Estate and Generation Skipping Transfer Tax Exemption:

The current gift, estate and generation skipping transfer tax (GST) exemption allows individuals to transfer up to $11.7 million ($23.4 million per married couple) of assets during life or at death without transfer taxes. This amount would be reduced to $3.5 million per individual ($7 million per married couple) for the estate tax (indexed for inflation) and for the GST (not indexed for inflation). Tax free gifting would be limited to $1 million (with no inflation indexing). This provision would be effective for gift, estate, and GST transfers made after December 31, 2021.

This basically brings back the tax rates of 2009 and proposes a notable departure from our current unified gift and estate tax structure which provides a single gift and estate tax exemption amount. If passed, instead of the ability to remove $11.7 million from the taxable estate, individuals would be limited to $1 million of gifts during life and to $3.5 million of tax- free transfers at death. The result would be an increased exposure to the gift and estate tax and reduced inheritances due to higher transfer taxes. The FINSECA lobbyist believes that the Democrats will continue to pursue changes in the wealth transfer space this year. He believes that the lowering of the $11.7 million gift and estate tax exemption is considered by many in Congress to be “low hanging fruit.”

For planning, this approach has been dubbed, “use it or lose it.” Given the broad Democratic legislative support for a reduction in the transfer tax exemption, individuals who have not taken full advantage of the $11.7 million exemption and can afford to, may want to seriously consider gifting highly appreciating, low basis assets directly to family or to a trust for the benefit of


family. Not only could this reduce future estate tax exposure, it could also avoid potential tax problems for beneficiaries who inherit assets at death. In addition to making direct gifts this year, if continued control over the assets is desired, gifting to a trust should be considered. The trust terms can be drafted to achieve specific goals plus the creator of the trust determines the trust’s Trustee. An added benefit is the creditor protection afforded certain trusts. Gifts to trust using the current lifetime exemption may be used as a source of funds to pay future premiums on a life insurance policy owned by the trust. A life insurance death benefit could significantly increase the return on the amount of the exemption used for premiums and provide an enhanced benefit for the family, a favorite charity, or both.

II. Gift, Estate and GST Tax Rate Increases:

The current maximum gift, estate and GST tax rate is 40%. This Act proposes to increase the top rates to 45% for estates between $3.5 million and $10 million; 50% for estates of $10 million to
$50 million; 55% for estates of $50 million to $1,000,000,000 and 65% for estates over
$1,000,000,000. The effective date for this provision is January 1, 2022.

These proposed tax rate increases further support the importance of exploring opportunities to reduce the taxable estate this year by making direct transfers, making transfers to trust, or making charitable gifts.

III. Grantor Trusts:

Grantor trusts are irrevocable trusts used to remove assets from the taxable estate while the trust income is taxed to the Grantor at the Grantor’s income tax rate. Though the Grantor pays the income tax on trust income, Grantor trust assets are not included in the Grantor’s taxable estate. A popular planning technique using Grantor Trusts is treating transfers to the trust as sales. This eliminates exposure to both gift and income tax because sales by an individual to the same individual for income tax purposes (the Grantor) are not subject to transfer tax.
This provision is intended to prevent wealthy families from avoiding gift taxes by using Grantor Trusts. It would require inclusion of all Grantor Trust assets in the Grantor’s taxable estate upon the Grantor’s death. It would eliminate the current step up in basis to fair market value on assets transferred at death unless the assets are taxed in the Grantor’s estate. Trust distributions made during the Grantor’s life would be considered taxable gifts made by the Grantor. Further, if an existing Grantor Trust is amended to eliminate its Grantor trust status, the assets in the trust will be taxed to the Grantor as gifts. This provision would be effective immediately upon the Act’s enactment.
There has been a lot of commentary about this proposal by planners and others in the popular media. Many have expressed concern about the impact of the inclusion of all Grantor Trust assets in the Grantor’s taxable estate on trust-owned life insurance policies. What many commentators appear to have missed is that the planning impact might not be as great as they are touting. This is because gifts to the trust sheltered from tax using the annual gift tax exclusion or the lifetime exemption are exempted from the estate tax inclusion rule of this provision. In addition, there are alternatives to making annual gifts to trust for premiums or

other uses. Transfers can be structured as loans from the Grantor or a split dollar life insurance plan could be adopted. Another alternative is to use LLCs or Partnerships instead of Grantor Trusts.
This proposed provision further highlights the need to consider using the $11.7 individual or
$23.4 million exemption for spouses to make transfers to a trust owning life insurance as a future funding source for premiums. This provides a double benefit because it may also reduce the taxable estate.
IV. Asset Valuation Discounts:

The Act would impose new rules aimed at minimizing the use of asset discount planning to reduce a business’s value in the owner’s estate. The use of valuation discounts, like lack of control and lack of marketability, would no longer be available for business-related transfers if any party to the transfer, including family members, control the business entity or are majority owners. Non-business asset transfers would be valued as a direct asset transfer to the recipient, regardless of how the asset is owned.

V. Grantor Retained Annuity Trusts (GRATs):

GRATs are irrevocable trusts to which the Grantor transfers highly appreciating assets. The Grantor pays gift taxes based on the value of the assets transferred at the beginning of the trust term. The Grantor retains the right to receive a fixed income (an annuity) from the trust for a fixed period of years. At the end of the trust term, the remaining assets, including all appreciation, are transferred to the Grantor’s beneficiaries without additional transfer tax.
This provision of the Act would prevent donors from avoiding gift taxes by taking assets back shortly after they are transferred to the GRAT while leaving GRAT assets plus appreciation to heirs tax-free. It does this by imposing a minimum 10-year trust term and a maximum of life expectancy of the annuitant plus 10 years. The remainder interest at the termination of the trust term must be equal to the greater of 25% of the fair market value of trust assets or
$500,000.
This provision would basically eliminate the use of GRATs in wealth transfer planning. It would apply to transfers made to existing and newly created GRATs after the enactment date of the Act.
VI. Dynasty Trusts:

Dynasty trusts have long been a staple of planning for high-net-worth clients. They allow for the avoidance of wealth transfer taxes over multiple generations. In fact, dynasty trust planning prompted the enactment of the GST tax rules. On his website, Senator Sanders specifically points to billionaires like Sheldon Adelson and the Walton Family who have “manipulated” trust rules to pass fortunes over multiple generations without paying estate or gift taxes. The Act would impose a 50-year limit on the life of a Dynasty trust and tax distributions to a “skip” person (grandchild or a member of a lower generation) at the highest GST rate. This proposed rule would apply to all existing and newly created trusts. Alternative planning includes the use of

LLCs or Partnerships in lieu of trusts. Before pursuing this alternative, however, individual state laws should be reviewed as a limited number of states do not allow for perpetual LLCs or Partnerships.

VII. Gifts using the Annual Gift Tax Exclusion

Currently, an individual can gift up to $15,000 each year to each recipient with no limit on the number of recipients. The Act would limit the total amount of annual tax-free exclusion gifts to
$30,000 per individual regardless of the number of recipients and eliminate use of the exclusion altogether where the recipient cannot immediately liquidate the gift. Crummey provisions are often used in trust planning to increase the number of annual exclusion gifts that can be made in each year. They give the trust beneficiaries a temporary right to withdraw the gift. Once the limited period lapses, the beneficiaries’ rights to withdraw are terminated and the trustee is free to use the amounts transferred to the trust. Crummey provisions are often used to transfer sufficient amounts to life insurance trusts to fund annual premiums. This provision would effectively eliminate the use of Crummey trust provisions which would limit the number of annual tax-free gifts to trust. This rule would apply to gifts made in the calendar year after enactment.

As with Grantor trusts, alternatives to annual tax-free exclusion gifts include lifetime exemption gifts, donor loans and split dollar life insurance planning.

It is noticeable that the “For the 99.5% Act” does not propose a general elimination of the step up in basis to fair market value for assets transferred upon death, which is current law. Fear not, other legislators have introduced additional proposals. Senator Chris Van Hollen (D-MD) introduced the “STEP” Act (Sensible Taxation and Equity Promotion) that would impose a capital gains tax on assets transferred at death. Senator Ron Wyden (D-OR) introduced a bill that would impose a tax on all increases in asset values from year to year (essentially mark to market).
These additional tax proposals may appear somewhat arbitrary, but they are the result of a much broader plan to raise the capital gains tax rate to the level of ordinary income tax rates. Should these income tax rates be equalized without a tax event at death, the concern is that individuals would retain appreciated assets until death, where the basis step up would allow them to avoid tax on gain altogether. Without an elimination of the basis step up or an imposition of a capital gains tax at death, or the imposition of an annual mark to market gains tax, clients would continue to avoid tax on appreciated assets. With an equalization of the ordinary income and capital gains tax rates plus the enactment of even one of these appreciation recapture proposals, the planning advantage of holding appreciated assets until death is eliminated.
The message being sent by the introduction of these tax bills is clear. Certain members of Congress want to combat perceived rising economic inequality by substantially increasing the transfer tax burden on high-net- worth individuals and families by eliminating many common planning techniques. The strategies that are the subject of these bills are considered by some as “loopholes” which need to be plugged.
On Friday, May 28th, President Biden released his 2022 proposed budget and the US Department of Treasury released the “Green Book” providing explanations for the budget proposals. The President’s budget is

simply a “wish list” sent to Congress. Congress ultimately approves all federal funding. The $6 trillion budget reflects the President’s economic priorities. The proposals include funding to address climate change; promotion of clean energy technologies; billions for migrant children and teenagers at the southern boarder; support for the State Department and international programs to boost the reputation of the US in the world; funding to combat domestic terrorism and for the Justice Department’s Violence Against Women Act programs; support for high poverty schools; support for health policy initiatives; increased funding for the military; and billions to increase IRS enforcement activities.
This $6 trillion budget would be funded with tax increases on corporations and the wealthy. The $2 trillion corporate tax hike includes raising the current corporate tax rate of 21% to 28%. The top individual income tax rate would increase to 39.6% for married couples with more than $509,300 of income. The individual capital gains rate would also increase to 39.6% for taxpayers with income exceeding $1 million. The step up in basis on appreciated assets transferred at death would be eliminated, imposing a capital gains tax realization event.
What is likely to happen? It is, of course, impossible to predict. According to the FINSECA Congressional lobbyist, there is general bipartisan support for infrastructure bills, and this is where the immediate Congressional efforts are being spent. After that, he believes action will be taken to roll back the “giveaways” to the wealthy and businesses enacted in 2017 by the Tax Cuts and Jobs Act. This means increases in individual and corporate tax rates and a reduction in the estate tax exemption.
Before becoming law, all proposed bills must pass both houses of Congress and be signed by the President. In the best of times, this is a lengthy process. Challenges to passage include the lack of bipartisan support and the very narrow Democratic majority. Planning challenges include the possibility that one or more of these tax proposals may be applied retroactively, possibly even back to January 1st of this year. Retroactive application is not popular and has not occurred often, but it has happened in the past. As noted in this article, should some of these proposals become law, there are various planning strategies available to minimize the impact on current and future planning.
Now is a great time to have conversations with your advisors about the possible impact of these proposed changes on your personal and business planning and to discuss your options moving forward. Working in concert with your other advisors, your PRW Team is waiting to help you assess your planning challenges and explore your opportunities. Proper planning now may have a lasting impact on you and your family far into the future.

NOTICE: The foregoing is not intended nor should be construed as legal advice to any particular client and may not be used to avoid US tax penalties (IRS Circular 230). Clients should always consult their attorney about their individual circumstances. Investment Advisor Representatives offer financial advice through PRW Wealth Management, LLC. Registered Representatives offer securities through Lion Street Financial, LLC; member FINRA/SIPC. PRW Wealth Management, LLC and Lion Street Financial, LLC are not affiliated. PRW Wealth Management, LLC and Lion Street Financial, LLC do not provide legal or tax advice and are not Certified Public Accounting (CPA) firms.
Trading instructions sent via email may not be honored. Please contact PRW at (617)745-0900 for all buy/sell orders. Please be advised that communications regarding trades are for informational purposes only. Clients should continue to rely on confirmations and statements received from the asset custodian(s). CONFIDENTIAL: This communication, including attachments, is intended only for the exclusive use of addressee and may contain proprietary, confidential and/or privileged information. If you are not the intended recipient, you are hereby notified that you have received this message in error, and any use, review, copying, disclosure, dissemination or distribution is strictly prohibited. If you are not the intended recipient, please notify the sender immediately by return email, delete this communication and destroy any and all copies of the communication.

To be sent as an email from PRW. Subject line: WHOLE LOTTA CONGRESSIONAL TAX LEGISLATIN’ GOIN’ ON Dear valued clients and friends,
President Biden took office advocating numerous tax law changes. Now that Democrats hold a slim margin in Congress, change is in the air, and several Democratic legislators have introduced bills focused on estate and gift taxes. These include the tax reform bill sponsored by Senators Bernie Sanders (D-VT) and Sheldon Whitehouse (D-RI), “For the 99.5% Act.” It has generated a lot of press coverage and caused ripples in the estate and tax planning world.
PRW’s Estate and Wealth Management Counsel, Janice Forgays, serves on the National Tax Committee of FINSECA, a financial services advocacy organization. In this message, Janice summarizes the various tax law changes offered in the “For the 99.5% Act” along with Senators Chris Van Hollen’s and Ron Wyden’s tax bills. She provides her planning recommendations based upon the provisions in the bills and information shared with the Tax Committee by the FINSECA Congressional Lobbyist, Jeff Ricchetti.
It is extremely important to understand what has been proposed but perhaps more important to recognize that these proposals are not law and there are certainly no guarantees of passage even with presumptive Democratic control in Congress. Planners and clients are best served by not overreacting and making significant planning changes before we have a much better indication of where these proposals are headed. Here is a summary of the tax bills introduced so far:
For the 99.5% Act

I. The Gift, Estate and Generation Skipping Transfer Tax Exemption:

The current gift, estate and generation skipping transfer tax (GST) exemption allows individuals to transfer up to $11.7 million ($23.4 million per married couple) of assets during life or at death without transfer taxes. This amount would be reduced to $3.5 million per individual ($7 million per married couple) for the estate tax (indexed for inflation) and for the GST (not indexed for inflation). Tax free gifting would be limited to $1 million (with no inflation indexing). This provision would be effective for gift, estate, and GST transfers made after December 31, 2021.

This basically brings back the tax rates of 2009 and proposes a notable departure from our current unified gift and estate tax structure which provides a single gift and estate tax exemption amount. If passed, instead of the ability to remove $11.7 million from the taxable estate, individuals would be limited to $1 million of gifts during life and to $3.5 million of tax- free transfers at death. The result would be an increased exposure to the gift and estate tax and reduced inheritances due to higher transfer taxes. The FINSECA lobbyist believes that the Democrats will continue to pursue changes in the wealth transfer space this year. He believes that the lowering of the $11.7 million gift and estate tax exemption is considered by many in Congress to be “low hanging fruit.”

For planning, this approach has been dubbed, “use it or lose it.” Given the broad Democratic legislative support for a reduction in the transfer tax exemption, individuals who have not taken full advantage of the $11.7 million exemption and can afford to, may want to seriously consider gifting highly appreciating, low basis assets directly to family or to a trust for the benefit of

family. Not only could this reduce future estate tax exposure, it could also avoid potential tax problems for beneficiaries who inherit assets at death. In addition to making direct gifts this year, if continued control over the assets is desired, gifting to a trust should be considered. The trust terms can be drafted to achieve specific goals plus the creator of the trust determines the trust’s Trustee. An added benefit is the creditor protection afforded certain trusts. Gifts to trust using the current lifetime exemption may be used as a source of funds to pay future premiums on a life insurance policy owned by the trust. A life insurance death benefit could significantly increase the return on the amount of the exemption used for premiums and provide an enhanced benefit for the family, a favorite charity, or both.

II. Gift, Estate and GST Tax Rate Increases:

The current maximum gift, estate and GST tax rate is 40%. This Act proposes to increase the top rates to 45% for estates between $3.5 million and $10 million; 50% for estates of $10 million to
$50 million; 55% for estates of $50 million to $1,000,000,000 and 65% for estates over
$1,000,000,000. The effective date for this provision is January 1, 2022.

These proposed tax rate increases further support the importance of exploring opportunities to reduce the taxable estate this year by making direct transfers, making transfers to trust, or making charitable gifts.

III. Grantor Trusts:

Grantor trusts are irrevocable trusts used to remove assets from the taxable estate while the trust income is taxed to the Grantor at the Grantor’s income tax rate. Though the Grantor pays the income tax on trust income, Grantor trust assets are not included in the Grantor’s taxable estate. A popular planning technique using Grantor Trusts is treating transfers to the trust as sales. This eliminates exposure to both gift and income tax because sales by an individual to the same individual for income tax purposes (the Grantor) are not subject to transfer tax.
This provision is intended to prevent wealthy families from avoiding gift taxes by using Grantor Trusts. It would require inclusion of all Grantor Trust assets in the Grantor’s taxable estate upon the Grantor’s death. It would eliminate the current step up in basis to fair market value on assets transferred at death unless the assets are taxed in the Grantor’s estate. Trust distributions made during the Grantor’s life would be considered taxable gifts made by the Grantor. Further, if an existing Grantor Trust is amended to eliminate its Grantor trust status, the assets in the trust will be taxed to the Grantor as gifts. This provision would be effective immediately upon the Act’s enactment.
There has been a lot of commentary about this proposal by planners and others in the popular media. Many have expressed concern about the impact of the inclusion of all Grantor Trust assets in the Grantor’s taxable estate on trust-owned life insurance policies. What many commentators appear to have missed is that the planning impact might not be as great as they are touting. This is because gifts to the trust sheltered from tax using the annual gift tax exclusion or the lifetime exemption are exempted from the estate tax inclusion rule of this provision. In addition, there are alternatives to making annual gifts to trust for premiums or

other uses. Transfers can be structured as loans from the Grantor or a split dollar life insurance plan could be adopted. Another alternative is to use LLCs or Partnerships instead of Grantor Trusts.
This proposed provision further highlights the need to consider using the $11.7 individual or
$23.4 million exemption for spouses to make transfers to a trust owning life insurance as a future funding source for premiums. This provides a double benefit because it may also reduce the taxable estate.
IV. Asset Valuation Discounts:

The Act would impose new rules aimed at minimizing the use of asset discount planning to reduce a business’s value in the owner’s estate. The use of valuation discounts, like lack of control and lack of marketability, would no longer be available for business-related transfers if any party to the transfer, including family members, control the business entity or are majority owners. Non-business asset transfers would be valued as a direct asset transfer to the recipient, regardless of how the asset is owned.

V. Grantor Retained Annuity Trusts (GRATs):

GRATs are irrevocable trusts to which the Grantor transfers highly appreciating assets. The Grantor pays gift taxes based on the value of the assets transferred at the beginning of the trust term. The Grantor retains the right to receive a fixed income (an annuity) from the trust for a fixed period of years. At the end of the trust term, the remaining assets, including all appreciation, are transferred to the Grantor’s beneficiaries without additional transfer tax.
This provision of the Act would prevent donors from avoiding gift taxes by taking assets back shortly after they are transferred to the GRAT while leaving GRAT assets plus appreciation to heirs tax-free. It does this by imposing a minimum 10-year trust term and a maximum of life expectancy of the annuitant plus 10 years. The remainder interest at the termination of the trust term must be equal to the greater of 25% of the fair market value of trust assets or
$500,000.
This provision would basically eliminate the use of GRATs in wealth transfer planning. It would apply to transfers made to existing and newly created GRATs after the enactment date of the Act.
VI. Dynasty Trusts:

Dynasty trusts have long been a staple of planning for high-net-worth clients. They allow for the avoidance of wealth transfer taxes over multiple generations. In fact, dynasty trust planning prompted the enactment of the GST tax rules. On his website, Senator Sanders specifically points to billionaires like Sheldon Adelson and the Walton Family who have “manipulated” trust rules to pass fortunes over multiple generations without paying estate or gift taxes. The Act would impose a 50-year limit on the life of a Dynasty trust and tax distributions to a “skip” person (grandchild or a member of a lower generation) at the highest GST rate. This proposed rule would apply to all existing and newly created trusts. Alternative planning includes the use of


LLCs or Partnerships in lieu of trusts. Before pursuing this alternative, however, individual state laws should be reviewed as a limited number of states do not allow for perpetual LLCs or Partnerships.

VII. Gifts using the Annual Gift Tax Exclusion

Currently, an individual can gift up to $15,000 each year to each recipient with no limit on the number of recipients. The Act would limit the total amount of annual tax-free exclusion gifts to
$30,000 per individual regardless of the number of recipients and eliminate use of the exclusion altogether where the recipient cannot immediately liquidate the gift. Crummey provisions are often used in trust planning to increase the number of annual exclusion gifts that can be made in each year. They give the trust beneficiaries a temporary right to withdraw the gift. Once the limited period lapses, the beneficiaries’ rights to withdraw are terminated and the trustee is free to use the amounts transferred to the trust. Crummey provisions are often used to transfer sufficient amounts to life insurance trusts to fund annual premiums. This provision would effectively eliminate the use of Crummey trust provisions which would limit the number of annual tax-free gifts to trust. This rule would apply to gifts made in the calendar year after enactment.

As with Grantor trusts, alternatives to annual tax-free exclusion gifts include lifetime exemption gifts, donor loans and split dollar life insurance planning.

It is noticeable that the “For the 99.5% Act” does not propose a general elimination of the step up in basis to fair market value for assets transferred upon death, which is current law. Fear not, other legislators have introduced additional proposals. Senator Chris Van Hollen (D-MD) introduced the “STEP” Act (Sensible Taxation and Equity Promotion) that would impose a capital gains tax on assets transferred at death. Senator Ron Wyden (D-OR) introduced a bill that would impose a tax on all increases in asset values from year to year (essentially mark to market).
These additional tax proposals may appear somewhat arbitrary, but they are the result of a much broader plan to raise the capital gains tax rate to the level of ordinary income tax rates. Should these income tax rates be equalized without a tax event at death, the concern is that individuals would retain appreciated assets until death, where the basis step up would allow them to avoid tax on gain altogether. Without an elimination of the basis step up or an imposition of a capital gains tax at death, or the imposition of an annual mark to market gains tax, clients would continue to avoid tax on appreciated assets. With an equalization of the ordinary income and capital gains tax rates plus the enactment of even one of these appreciation recapture proposals, the planning advantage of holding appreciated assets until death is eliminated.
The message being sent by the introduction of these tax bills is clear. Certain members of Congress want to combat perceived rising economic inequality by substantially increasing the transfer tax burden on high-net- worth individuals and families by eliminating many common planning techniques. The strategies that are the subject of these bills are considered by some as “loopholes” which need to be plugged.
On Friday, May 28th, President Biden released his 2022 proposed budget and the US Department of Treasury released the “Green Book” providing explanations for the budget proposals. The President’s budget is

simply a “wish list” sent to Congress. Congress ultimately approves all federal funding. The $6 trillion budget reflects the President’s economic priorities. The proposals include funding to address climate change; promotion of clean energy technologies; billions for migrant children and teenagers at the southern boarder; support for the State Department and international programs to boost the reputation of the US in the world; funding to combat domestic terrorism and for the Justice Department’s Violence Against Women Act programs; support for high poverty schools; support for health policy initiatives; increased funding for the military; and billions to increase IRS enforcement activities.
This $6 trillion budget would be funded with tax increases on corporations and the wealthy. The $2 trillion corporate tax hike includes raising the current corporate tax rate of 21% to 28%. The top individual income tax rate would increase to 39.6% for married couples with more than $509,300 of income. The individual capital gains rate would also increase to 39.6% for taxpayers with income exceeding $1 million. The step up in basis on appreciated assets transferred at death would be eliminated, imposing a capital gains tax realization event.
What is likely to happen? It is, of course, impossible to predict. According to the FINSECA Congressional lobbyist, there is general bipartisan support for infrastructure bills, and this is where the immediate Congressional efforts are being spent. After that, he believes action will be taken to roll back the “giveaways” to the wealthy and businesses enacted in 2017 by the Tax Cuts and Jobs Act. This means increases in individual and corporate tax rates and a reduction in the estate tax exemption.
Before becoming law, all proposed bills must pass both houses of Congress and be signed by the President. In the best of times, this is a lengthy process. Challenges to passage include the lack of bipartisan support and the very narrow Democratic majority. Planning challenges include the possibility that one or more of these tax proposals may be applied retroactively, possibly even back to January 1st of this year. Retroactive application is not popular and has not occurred often, but it has happened in the past. As noted in this article, should some of these proposals become law, there are various planning strategies available to minimize the impact on current and future planning.
Now is a great time to have conversations with your advisors about the possible impact of these proposed changes on your personal and business planning and to discuss your options moving forward. Working in concert with your other advisors, your PRW Team is waiting to help you assess your planning challenges and explore your opportunities. Proper planning now may have a lasting impact on you and your family far into the future.
We look forward to speaking with you,
Janice
Janice A. Forgays, Esq., AEP®, CLU®
Estate and Wealth Management Counsel PRW Wealth Management LLC
Clarity for the Present ♦ Vision for the Future

PRW Wealth Management LLC

1 Pine Hill Drive, Suite 502
Quincy, MA 02169-7400
P:(617)745-0900 x121
F:(617)745-0910
www.prwwealthmanagement.com

NOTICE: The foregoing is not intended nor should be construed as legal advice to any particular client and may not be used to avoid US tax penalties (IRS Circular 230). Clients should always consult their attorney about their individual circumstances. Investment Advisor Representatives offer financial advice through PRW Wealth Management, LLC. Registered Representatives offer securities through Lion Street Financial, LLC; member FINRA/SIPC. PRW Wealth Management, LLC and Lion Street Financial, LLC are not affiliated. PRW Wealth Management, LLC and Lion Street Financial, LLC do not provide legal or tax advice and are not Certified Public Accounting (CPA) firms. Trading instructions sent via email may not be honored. Please contact PRW at (617)745-0900 for all buy/sell orders. Please be advised that communications regarding trades are for informational purposes only. Clients should continue to rely on confirmations and statements received from the asset custodian(s). CONFIDENTIAL: This communication, including attachments, is intended only for the exclusive use of addressee and may contain proprietary, confidential and/or privileged information. If you are not the intended recipient, you are hereby notified that you have received this message in error, and any use, review, copying, disclosure, dissemination or distribution is strictly prohibited. If you are not the intended recipient, please notify the sender immediately by return email, delete this communication and destroy any and all copies of the communication.

Democrat’s Budget Reconciliation Bill: Fact and Fiction

A BIT OF HISTORY
President Biden introduced his “wish list” for legislation outlined in the Green Book issued in May of this year. The estimated cost to adopt his budget proposals was over $6 trillion. That wish list has translated into a pared-down $3.5 trillion 881-page octopus with tenacles touching a vast range of areas from childcare to climate change. In August, the Senate passed a $1 trillion infrastructure bill with bipartisan support. It is currently in the House for a vote. Meanwhile, recognizing there would not be bipartisan support for the additional measures progressive democrats are demanding, many additional items from the wish list have been introduced by House Democrats in a Budget Reconciliation Bill. This was a strategic move since passage of a Reconciliation Bill only requires a simple majority of 51 Senate votes, not the usual 60 votes needed to overcome a filibuster. Despite the crafty strategy, every Democrat in the Senate needs to vote for this $3.5 trillion bill for it to pass. This seems highly unlikely given the vocal opposition from Senators Manchin and Sinema. Plus, it is well understood that there is no Senate Republican support for the bill.

 

Here’s the rub: both the Senate Infrastructure bill and the House Reconciliation Bill will be voted on at about the same time in the House. The progressives in the House have taken the position that unless the Reconciliation Bill has the needed support in the Senate, they will oppose the infrastructure bill.

 

Currently, the Reconciliation Bill is in the “markup” process in numerous House committees. This is where changes and eliminations occur. Progress on the details of the bill have has been hampered by the conflicting progressive and centrist factions of the party. The progressives see the $3.5 trillion package as a big drop from what they originally sought. The centrists, including many who could face difficult reelection bids, are concerned that the bill is too big and too expensive.

 

As introduced, there is “zero chance” of the Reconciliation Bill getting a party-line vote in both the House and the Senate without significant concessions on the price tag and how it is paid for says Donald R. Wolfensberger, a Congress scholar at the Woodrow Wilson International Center for Scholars and the Bipartisan Policy Center.[1]

 

FUNDING PROPOSALS FOR THE RECONCILIATION BILL

In order to pass a fiscal bill, funding sources must be identified. This is where much of the media attention and alarmist focus has been. Here are some of the funding sources that have dominated the media:

I.Individual, Capital Gains and Corporate Income Tax Rate Increases:

a.Individual Rates:

i. Raise the top individual rate to 39.6% for single filers with taxable income over $400,000 and over $450,000 for joint filers.

 

ii. Add a 3% surcharge on modified adjusted gross income above $5 million.

 

iii. Prohibit Individual Retirement Account (IRA) contributions when the account balance reaches $10 million and accelerate required minimum distributions for those accounts. This applies to income earners over $400,000 for single filers and $450,000 for joint filers.

 

iv. Eliminate Roth conversions for single filers with income over $400,000 million and joint filers over $450,000.

 

b. Capital Gains Rates:

 

i. Increase the current top rate of 20% to 25%.

 

c. Net Investment Income Tax Rates:

 

i. Apply Net investment income rates to income derived in the ordinary course of trade or business for single filers with income over $400,000 and over $500,000 for joint filers. This would also apply to trusts and estates.

 

d.Corporate Rates:

 

i. Replace the flat 21% rate with graduated rates of 18% on the first $400,000 of income; 21% on income between $401,000 and $5 million; and 26.5% on income above $5 million. The graduated rates phase out and the top rate applies to corporations with income over $10 million.

 

II.Lifetime Gift and Estate Tax Exemption Reduction:

 

The current lifetime gift and estate tax exemption is $11.7 million per individual ($23.4 million per married couple). This exemption amount is scheduled to “sunset” at the end of 2025 and reduce to $5 million per individual, indexed for inflation. The Reconciliation Bill will accelerate the “sunset” to the end of 2021. This means an exemption beginning in 2022 of approximately $6.2 million per individual.

 

III. Grantor Trust Changes:

 

Grantor trusts are irrevocable trusts used to remove assets from the taxable estate while taxing trust income back to the Grantor at a presumably lower individual tax rate than the trust’s rate. Though the Grantor pays the tax on the trust income, the trust assets are not included in the Grantor’s taxable estate. This bill would require the inclusion of all the Grantor trust assets in the Grantor’s taxable estate at death. Further, trust distributions made during the Grantor’s life would be taxed as gifts made by the Grantor.

No other provision in the Reconciliation Bill has generated more alarmist rhetoric in the planning arena. Many appear to have missed two significant exceptions in the original draft of the bill. Notably if either exception applied, the whole provision did not apply. These are:

 

• Any estate tax inclusion of trust assets to the Grantor is reduced by the value of any transfer to the trust previously taken into account by the Grantor under Chapter 12 of the Internal Revenue Code which includes taxable gifts, gifts made using the annual gift tax exclusion and gifts made using the lifetime gift and estate tax exclusion.

• Any trust the Secretary determines by regulations or guidance that does not have as a significant purpose the avoidance of taxes.

 

These exceptions were changed by the House Ways and Means Committee during mark up. The bill currently provides for an exclusion from estate tax inclusion of Grantor trust assets for gifts made to or transfers made from trust under Chapter 12, which includes gifts sheltered from tax by the annual exclusion or by the lifetime credit. So, even after the changes made in the Ways and Means Committee, at the very least, the gifts made pursuant to Chapter 12 will not be brought back into the Grantor’s taxable estate at death. The death knell rung by alarmists for Grantor trust-owned life insurance certainly appears to be pre-mature. Most policy premiums are paid using gifts to the trust that are sheltered from tax by the annual exclusion or the lifetime exemption. What is unclear is whether the assets purchased within the trust using the gifts made under Chapter 12 fall under the exemption or whether the exemption is limited to the gifts made to trust. Of course, there are planning alternatives to avoid Grantor trusts altogether by using an LLC or Partnership to own the policy.

 

The changes made in Committee indicate how in flux the provisions of the reconciliation bill are. It is important to note that if or when the House votes the bill out, the Senate will certainly make significant changes, so there is no way to predict what the final bill, if there is one, will look like.

 

WHAT MIGHT HAPPEN NOW?

Congressional Democrats could cut entire specific spending programs or cut many programs by a specific percentage. They could increase the individual and corporate income tax rates even more than currently proposed. As noted earlier, the push-me pull-you within the Democratic party in Congress runs the risk of killing the bill entirely. The moderates believe the bill is too big and too expensive. The progressives do not think it is big enough. Neither side has indicated a willingness to compromise. Most pundits agree that something will be passed but they also agree that it will not look much like what is currently under consideration. One thing is certain, there is no certainty here except the current bill will change.

 

SO, WHAT TO DO?

Make a point of having conversations with your advisors about the possible impacts of these proposals on your personal and business planning, and discuss your options moving forward. Your PRW team is waiting to help assess any planning challenges and explore your opportunities. There is still time to make an impact on your 2021 circumstances.

 

Janice
Janice A. Forgays, Esq., AEP®, CLU®
Estate and Wealth Management Counsel

PRW Wealth Management LLC
Clarity for the Present  Vision for the Future

1 Pine Hill Drive, Suite 502
Quincy, MA 02169-7400
P:(617)745-0900 x121
F:(617)745-0910
www.prwwealthmanagement.com

 

NOTICE: The foregoing is not intended nor should be construed as legal advice to any particular client and may not be used to avoid US tax penalties (IRS Circular 230). Clients should always consult their attorney about their individual circumstances.

 

PRW Wealth Management LLC is a registered investment advisor (“RIA”) with the U.S. Securities and Exchange Commission (“SEC”). Investment Advisor Representatives offer financial advice through PRW Wealth Management, LLC. Registered Representatives offer securities through Lion Street Financial, LLC; member FINRA/SIPC. PRW Wealth Management, LLC and Lion Street Financial, LLC are not affiliated. PRW Wealth Management, LLC and Lion Street Financial, LLC do not provide legal or tax advice and are not Certified Public Accounting (CPA) firms. Trading instructions sent via email may not be honored. Please contact my office at (617)745-0900 for all buy/sell orders. Please be advised that communications regarding trades in your account are for informational purposes only. You should continue to rely on confirmations and statements received from the custodian(s) of your assets.

 

** CONFIDENTIAL: This communication, including attachments, is intended only for the exclusive use of addressee and may contain proprietary, confidential and/or privileged information. If you are not the intended recipient, you are hereby notified that you have received this document in error, and any use, review, copying, disclosure, dissemination or distribution is strictly prohibited. If you are not the intended recipient, please notify the sender immediately by return email, delete this communication and destroy any and all copies of the communication. **

The Ukraine Crisis

Last week’s Russian invasion of Ukraine and the ongoing and intensified movement this week have the world on edge and have added further uncertainty to global financial markets. The response from the U.S. and NATO is fluid and we do not pretend to know how all plays out. We certainly pray that things resolve soon and without further bloodshed.

Market volatility leading up to this moment has been normal from a historical standpoint- geopolitical crises and regional conflicts tend to hurt sentiment, create short-term uncertainty, and drive volatility. Looking back at 54 crisis events since 1907, the Dow Jones Industrial Average declined 7.1% on average, according to global investment research firm Ned Davis Research.

[1]The chart here provides a look at the impact of prior conflict on the S&P 500 index. What we do know is that diversification

[2] remains an important strategy in times like these and that attempts to anticipate what will happen are futile. Trying to extrapolate the market impact is even harder as evidenced by the sharp reversal in the markets on the day of the invasion. We anticipate continued volatility ahead but remind ourselves that the S&P 500 has an average intra- year drawdown of 14% since 1980, yet still generated a positive return in 35 out of 42 years.

[3] Market volatility is a normal part of investing, and we are not proposing major changes to portfolio positioning. That said, we continue to monitor the evolving situation. As for the near-term impact on the economy, high energy prices are a tax on consumers, and non-energy commodity price hikes could further roil global supply chains. Both could continue to rise further. Russia is the third-largest oil producer after the U.S. and Saudi Arabia, contributing 11% of global supply in 2020.

[4] Prices could be triggered higher by disruptions to production or sanctions, which could then impair U.S. and global consumers that are already dealing with the highest inflation in decades. By our reading, consumers are generally in good shape with high levels of savings, job growth, and rising wages, but if the conflict led to persistently higher prices, it could weaken the global recovery.
Russia and Ukraine are important suppliers of many commodities. In a February 23rd article on Bloomberg.com, the authors note that “Russia is a low-cost, high-volume global producer for all major fertilizers, and it’s the world’s second-largest producer after Canada of potash, a key nutrient used on major commodity crops and produce. The tension in the region, as well as sanctions on Russia, could hurt trade flows.” Both countries are large providers of palladium, a necessary component of catalytic converters. With semiconductor supply already impaired, if Ukraine (a key source of multiple necessary gasses used in production) were to be disrupted it could likely mean more ripple effects for already-challenged global supply chains.
We have shared below some thoughts from Brian Wesbury, Chief Economist at First Trust, and Robert Stein, CFA – Deputy Chief Economist, who look at the impact that this situation may have on public policy and in turn overall economic growth.

Thoughts on Ukraine

[5]They say the truth is the first casualty of war…so, here we are about one week into the Russian invasion of Ukraine and the fog of war is still very thick.

Over the past few weeks, it has been conventional wisdom that Russia would take parts of Ukraine (maybe all) and then things would settle down while the world awaited further actions. In the worst-case scenario, those moves could include closing the current 40-mile wide border between Poland and Lithuania, which could lead to direct NATO military involvement and a wider conflict.

So far, things haven’t unfolded as many thought they would. Supply-chain issues for the Russian military and formidable opposition are slowing Russia’s advance. In addition, more sanctions and military help from countries around the world have given many hope that hostilities end early with Russia falling well short of its goals.

If Russia is unable to take control of Ukraine or even forced to retreat, Vladimir Putin could be in more than just political trouble. His inner circle may not like risking access to their personal wealth on what they might believe is an ill-advised military adventure. For Putin, this is a huge incentive to continue his attack, and escalate. Nothing is totally clear.

What we are more confident about is what the conflict means for public policy. Policies designed to suppress US energy production are going to be tougher for the voting public to digest. The same is true for many European countries, with Germany now discussing building a natural gas reserve.

How about green energy? Many will keep pushing it, and those projects will continue, but it’s going to be tougher to curtail drilling, extraction, and pipelines for old-fashioned fossil fuels.

Meanwhile, Build Back Better, President Biden’s plan to raise spending and taxes for the next decade, looks even less likely than before. War means disruption and many will argue we should wait and see how the economy reacts to the conflict.

In addition, while the war will likely make global supply-chain issues even more problematic and inflationary, the Federal Reserve is likely to pull back on tightening plans because of the potential economic upheaval. A rate hike of 50 basis points in March is unlikely.

Meanwhile, at least one polling average now shows the GOP ahead in the congressional generic ballot by 3.7 points over the Democrats.
[6] Comparing this to historical readings suggests the government will be politically divided in 2023. In turn, divided government reduces the odds of future tax hikes and spending increases.

In addition, while not related to Ukraine, we think the Supreme Court’s recent decision slapping down private-sector vaccine mandates by OSHA is a sign that it is willing to limit the power of bureaucrats. This is good news for growth.

Put it all together and we think the prospects for more bills that expand government are waning while the Court seems to be more wary of regulatory expansions, as well.

While war is hell and our prayers are with the Ukrainians, the direction of policy is moving toward the better.

[1] https://www.bloomberg.com/news/articles/2022-02-22/-every-market-is-oversold-wall-street- bulls-on-Ukraine-crisis

[2] Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk
[3] https://financialadvisoriq.com/c/3514184/437904/wirehouses_react_ukraine_dispense_recomme nations
[4] /search?q=Russia+is+the+third- largest+oil+producer+after+the+U.S.+and+Saudi+Arabia%2C+contributing+11%25+of+global+ supply+in+2020.&rlz=1C5CHFA_en&oq=Russia+is+the+third-largest+oil+producer+after+t https://www.google.com he+U.S.+and+Saudi+Arabia%2C+contributing+11%25+of+global+supply+in+2020.&aqs=chro me..69i57.1812j0j7&sourceid=chrome&ie=UTF-8
[5] Written by Brian Wesbury, permission given by Brian Wesbury https://www.ftportfolios.com/retail/blogs/Economics/index.aspx
[6] https://www.bloomberg.com/news/articles/2022-02-23/russia-ukraine-tensions-spur-fears-of- fertilizer-shortages-food-price-hikes

The information provided is for educational and informational purposes only and does not constitute investment on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into investment objectives, strategies, tax status or investment horizon. You should consult your atto