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Nora Gieg Chatha

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Co-chair, Fiduciary Services & Risk Management Group

Chair, Estates & Trusts Group

Member, Tucker Arensberg Board of Directors

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Recent Federal and State Law Developments Impacting Estate Planning in Pennsylvania

Nora Gieg Chatha, Esq., (412) 594-3940, nchatha@tuckerlaw.com

Under federal law each individual has a lifetime federal estate and gift tax exemption (the “E&T Exemption”) and a generation skipping transfer tax exemption (the “GST Exemption” together with the E&T Exemption, the “Individual Exemptions”), which both increased to $13,610,000 in 2024 from $12,920,000 in 2023. 

The E&T Exemption is “coupled” such that it can be used for either lifetime transfers or transfers at death (or a combination), and one spouse’s unused E&T Exemption may be transferred to his or her surviving spouse via the timely filing of a federal estate tax return.  Notably, the GST Exemption is not coupled and may not be passed to a surviving spouse.

Federal law also provides for an annual gift tax exclusion, which is the amount that an individual can gift to any number of persons per year without using the E&T Exemption.  The annual gift tax exclusion has increased to $18,000 per donee in 2024 from $17,000 in 2023.  Annual exclusion gifts may be split between spouses, such that in 2024 a couple may jointly gift $36,000 (or one can gift $36,000 with the other joining on a gift tax return) to any number of persons without using their respective Individual Exemptions.

Absent a change in federal law, the Individual Exemptions will increase again in 2025 based on the inflation rate, and then in January 2026 the law will “sunset” and the Individual Exemptions will revert to $5,000,000, adjusted for inflation pursuant to the prior laws.

Estate and trust practitioners have been closely tracking these Individual Exemptions to advise clients on methods to freeze the value of assets or transfer them with the goal of having future appreciation occur outside of the client’s taxable estate and to further consider gifting assets prior to 2026 to take advantage of the significantly increased Individual Exemptions, particularly the non-portable GST Exemption, before the sunset.

Common planning techniques include lifetime gifts or sales of closely held business assets into irrevocable trusts.  Practitioners must be aware of several significant developments impacting the funding of irrevocable gifting trusts.

Notably, many of the lifetime gifting trusts used by clients for their estate planning are designed to be “Grantor Trusts” for income tax purposes, meaning that the client funding the trust is treated as the owner of the trust assets for income tax purposes, both to simplify tax reporting and, more importantly, to enable the client to pay the income tax due on the trust’s income without being deemed to have made an additional gift that would further exhaust the client’s Individual Exemptions.

Pennsylvania was the last state in the nation to recognize the federal grantor trust rules.  Pennsylvania Governor Shapiro signed Senate Bill 1815 into law on December 14, 2023, which amended the Pennsylvania Tax Code to add subparagraph (c) to 72 P.S. § 7302, effective January 1, 2025, to provide that income received by a Pennsylvania resident trust, or by a non-resident trust from sources within Pennsylvania, which is a grantor trust for federal income tax purposes, will be taxable to the grantor for Pennsylvania income tax as well, regardless of whether the income is distributed to the beneficiary.  This important and long-awaited change brings Pennsylvania law current with the other 49 states and the District of Columbia and will provide a significant benefit to eliminate certain administrative and tax complexities that previously existed under Pennsylvania income tax law.  However, it will not apply to trusts for 2023 or 2024 tax years.

Clients owning and/or transferring closely held business interests as part of their estate planning must also now comply with the federal Corporate Transparency Act (the “CTA”), which became effective January 1, 2024, and requires the reporting of beneficial ownership information on closely held business entities operating in the United States to the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the United States Treasury Department.

All “reporting companies” will be required to file reports with FinCEN that provide certain information regarding the reporting companies and the “beneficial owners” of the companies, unless they meet certain exceptions.  Two of the notable exceptions include (i) tax-exempt entities; and (ii) U.S. entities that have over 20 employees, have a place of business in the U.S., and have gross revenues in excess of $5M+ annually.

CTA regulations outline the reporting obligations in the trust and estate context, and generally treat as beneficial owners (1) those who exercise substantial control over the reporting company and (2) those who own or control 25% of the reporting company. 

There can be multiple deemed owners of an interest in a reporting company through a trust arrangement, and the preamble to the regulations states that an individual “may directly or indirectly own or control an ownership interest of a reporting company through any contract, arrangement, understanding, relationship, or otherwise.” 

The CTA creates its own determination with respect to “ownership,” and the parameters under the CTA regulations do not follow the attribution rules for ownership and control for federal income tax purposes, as set forth in Section 318 of the Internal Revenue Code (26 USC § 318).

Practitioners representing clients whose taxable estates may exceed the Individual Exemptions or otherwise own interests in closely held reporting companies under the CTA are encouraged to familiarize themselves with Pennsylvania’s new grantor trust rules and the CTA reporting requirements. 

Nora Gieg Chatha is a fellow of the American College of Trust and Estate Counsel (ACTEC) and a Certified Elder Law Attorney by the National Elder Law Foundation and provides comprehensive representation to individual and corporate fiduciary clients in a variety of complex situations. For more information email nchatha@tuckerlaw.com or call (412) 594-3940.

Reprinted with permission from the February 13, 2024, issue of The Legal Intelligencer. © 2024 ALM Media Properties, LLC. Further duplication without permission is prohibited.  All rights reserved.

February 19, 2024

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