09/22/2021 | News release | Distributed by Public on 09/21/2021 16:25
On September 13, 2021, the House Ways and Means Committee released its tax proposal (the Committee Proposal) for raising revenue to help fund President Biden's Build Back Better Act.
While much can and, likely, will change during the legislative process, if enacted in their current form under the Committee Proposal, the changes outlined in "Estate Planning Related Highlights" below would have a significant impact on estate planning by (i) accelerating to the end of this year the reduction of the estate, gift and generation-skipping transfer (GST) tax exemption amounts that were doubled for a limited period of time during the last administration and (ii) changing dramatically the income and transfer tax rules with respect to grantor trusts, as well as valuation rules for certain transfers.
Given this uncertain environment for estate planning, clients should consider the following:
In addition, the Committee Proposal contains a number of other, very significant income tax changes (including increased ordinary income and capital gains tax rates for high earners, trusts and estates); of particular note are proposed limitations on certain types of investments currently available for IRAs, the elimination of Roth conversions for high earners beginning on January 1, 2022 and additional distribution requirements for retirement accounts exceeding $10 million in the aggregate. Clients with non-Roth retirement accounts may wish to explore with their financial advisers whether it makes sense to effectuate a Roth conversion before year-end.
Under the Committee Proposal, on January 1, 2022, the estate, gift and GST tax exemption amounts, currently $11.7 million per individual ($23.4 million combined for a married couple), would be reduced to $5 million per individual ($10 million combined for a married couple), plus relevant inflation adjustment amounts. The Committee Proposal accelerates the timing for the reduction in the exemption amounts which, under current law, is scheduled to take effect at the end of 2025.
The reduced exemption amounts would apply to gifts made, and estates of decedents dying, after December 31, 2021.
The Committee Proposal would have a dramatic impact on planning with grantor trusts.
A grantor trust includes a trust where the grantor is treated as the owner of the trust property for Federal income tax purposes but not estate tax purposes. Under current law, transactions between a grantor and a grantor trust generally are disregarded for income tax purposes.
The proposed grantor trust legislation is broad in scope and, on its face, could affect many types of trusts, including GRATs, QPRTs and SLATs, as well as more common planning vehicles such as irrevocable descendants trusts and irrevocable life insurance trusts. This may prompt significant modifications to the relevant legislative provisions (particularly related to insurance trusts), but at this stage we cannot predict whether final legislation, regulations or IRS guidance will exempt certain types of grantor trusts or particular transactions with grantor trusts.
Under the Committee Proposal, a grantor trust created on or after the enactment date would be subject to the following transfer and income tax rules:
These changes would apply not only to grantor trusts created on or after the date of enactment of the legislation, but also to any portion of a grantor trust created before the enactment date that is attributable to a contribution made on or after the enactment date. There is currently no guidance as to how these rules might impact other events involving pre-enactment date grantor trusts such as decanting, exercise of powers of appointment and establishment of successor trusts under a pre-enactment date trust instrument.
The Committee Proposal would eliminate valuation discounts for transfers of interests in entities such as partnerships and LLCs that own nonbusiness assets - generally passive assets, such as cash, stock, bonds and real property (with exceptions) - not used in the active conduct of a trade or business. This change would apply to transfers made after the date of enactment of the legislation. Clients considering gifts of interests that currently would allow for valuation discounts should make such gifts prior to the date of enactment.