Recent Developments (10-26-2020) 1. November 3, 2020 California Propositions on ballot. There are two very critical Propositions on the California ballot relating to real property taxes: a) Proposition 15: This is the “split roll” constitutional measure. Currently the annual California real property tax cannot exceed 1% of the “assessed value” of a real property [plus bonded indebtedness]. For newly purchased properties the assessed value is the purchase price. But for older properties, there is a reduced value based on the property’s “base value” when it was purchased, or inherited (in some cases), or otherwise protected under our old 1978 Proposition 13. If this new Proposition passes, commercial and industrial properties will be reassessed annually (or at least every three years) and the assessed value to determine real property taxes will be the current year’s fair market value of the property. This does not apply to residential properties (homes, apartments, etc.) and some real properties owned by small businesses. b) Proposition 19: If it passes, this Proposition will: (1) Continue to allow persons over 55 (or the disabled) to take their “Proposition 13 low assessed value” of their old home if they purchase a new home. (2) Permit transfer of the assessed value to a new property anywhere within the state (presently it is available only if the two involved counties agree). (3) Permit the low assessed value to be substantially transferred even if the new property costs more than the old property sells for. (4) Allow the over 55 year old taxpayer to use this benefit three times (it presently only allows one transfer). (5) Restrict the right of a child/children to keep the low “Proposition 13 assessed value” on a transfer of a parent’s principal residence, because the child/children must also use the property as their principal residence within one year after the parent’s death or transfer, and the property cannot be worth more than $1,000,000 above the assessed value. (6) Eliminate the right of a child/children to keep the low Proposition 13 assessed value on any real property other than a parent’s principal residence (there is currently a $1,000,000 “safe harbor” of assessed values for such other properties). c) There was also a legislative “wealth tax” proposal (AB 2088 - not passed at present) for imposition of an annual 0.4% tax on all California residents who have a net worth (globally) of more than $30,000,000. It hasn’t passed, and Governor Newsom opposes it, but who knows if it will surface again. d) There was also a legislative income tax increase proposal (AB 1253 - also not passed at present) which would have added income tax brackets - a 1% added tax on the first $1,000,000 in income over $1,000,000; a 3% added tax on the next $3,000,000 in income; and a 3.5% added income tax on all income over $5,000,000. 2. November 3, 2020 federal elections. The outcome of the federal elections (President, House, and Senate) and future legislative activity may impact a number of federal tax laws related to trusts and estates and income taxes. Whomever wins will have to face a rather massive federal debt and will ultimately need federal revenue from somewhere. a) Possible increase in maximum ordinary income tax rate for individuals who earn more than $400,000 above its current low 37% rate to its earlier 39.6% rate; and for corporations increase the current 21% rate to its earlier 35% rate (or perhaps a still reduced 28% rate). b) Possible increase in maximum capital gains tax rate above its current low 23.8% rate to perhaps capital gains and dividend income rate of to 43.3% (39.6% + 3.8%) for taxpayers earning more than $1 million.. c) Possible elimination of GRATS (Grantor Retained Annuity Trusts). d) Possible elimination of estate tax discounts on values of undivided interests in entities. e) Change in income tax benefits available to Grantor Trusts. f) Possible requirement that Generation Skipping Transfer Tax will apply after 50 years. g) Possible early reduction in gift and estate tax exclusion (currently $11,580,000, but scheduled to decrease to approximately $5,800,000 for gifts and deaths after 12-3-1-2025). h) Possible increase in federal estate tax rate (currently 40%) on estates exceeding the exempt amount. i) Possible elimination of income tax basis adjustment (“step-up”) at decedent’s death; or treating the appreciated portion as subject to income tax (as if sold at immediately prior to death). j) This means that many clients may consider making low interest rate loans to children, using the accepted federal AFR tables which currently require an interest rate of between 0.13% and 1.17% depending on the length of the loan term. k) This means that some clients with asset values exceeding $23,000,000 may consider: (a) Making large gifts now, to avoid losing “extra” presently available exemption of $5,780,000 [$11,580,000 less $5,800,000 scheduled reduction]. (b) Creating an irrevocable SLAT (Spousal Lifetime Asset Trust) for a spouse to receive income, which spouse will hopefully share with donor; and possibly with one or more “non-reciprocal” but similar trusts by the spouse for the benefit of the other donor. (c) Creating DAPTs (Domestic Asset Protection Trusts). (d) Creating irrevocable trusts for named beneficiaries, but providing that an independent Trustee (“Protector”) has the discretion how and when to make distributions among the beneficiaries, and to add beneficiaries.. (e) Creative uses of disclaimers.

IRS inflation rates for 2021 On 10-26-2020 the Internal Revenue Service published the 2021 annual inflation adjustments [Rev Proc 2020-45]. This publication changes various federal tax rate tables for the calendar year 2021. The primary changes relevant to estate planning consist of the following: The estate tax exclusion increases from $11,580,000 to $11,700,000. This same exclusion applies for gift tax and generation skipping transfer tax (GSTT) purposes. The gift tax annual exclusion stays constant at $15,000. The income tax rate for trusts and estates is now: 10% of taxable income below $2,650 24% of taxable income between $2,650 and $9,550 35% for taxable income between $9,550 and $13,050 37% for taxable income above $13,050