1. Reduction in the Unified Credit. The unified credit against estate and gift taxes was proposed to revert to its 2010 level of $5 million per individual, indexed for inflation. Under the Build Back Better Act, no reduction in the unified credit is proposed. Thus, the unified credit remains at an all-time high of $11.7 million for each individual citizen or resident of the U.S.
2. New Grantor Trust Rules.
   The House had proposed significant changes for grantor trusts under the House Proposal. It was proposed that Grantor trusts created on or after the date of enactment of the new law are includable in the Grantor’s taxable estate and sales between a grantor trust and the Grantor (or the deemed owner) would be treated the same as sales between the Grantor and a third party. The Build Back Better Act does not currently provide for any changes to grantor trust treatment. Thus, the valuable grantor trust planning opportunity remains an important estate planning option at present.
3. Limiting Valuation Discounts. The House Proposal provided that “nonbusiness assets” would not receive valuation discounts for transfer tax purposes. The Build Back Better Act does not provide for any changes in valuation discounts. Thus, the use of intra-family valuation discounts remains a valuable estate planning opportunity.
4. QSBS Limitation for Certain High-Income Individuals. The House Proposal and the Build Back Better Act both proposed that the 75 percent and 100 percent exclusion rates for gains realized from qualified small-business stock (QSBS) if taxpayer’s income exceeds $400,000 would be eliminated. The 50 percent exclusion would still apply.
5. Graduated Corporate Rate Structure; Rate Increases. The House proposed introduction of a graduated corporate rate structure:
   a. 18 percent on the first $400,000 of income;
   b. 21 percent on income $400,001 to $5 million;
   c. 26.5 percent on income thereafter.
   The Build Back Better Act did not provide for this graduated corporate rate structure.
6. Individual Income Tax Rate Increase. The House Proposal would have increased the top marginal individual income tax rate to 39.6 percent. The Build Back Better Act did not propose changes to the individual income tax rates, but see the surcharge discussion below.
7. Increase in Capital Gains Rate for Certain High-Income Individuals. The House Proposal would have increased the top capital gains rate to 25 percent (current rate is 20 percent). The Build Back Better Act did not propose an increase in the capital gains rate.
8. Surcharge on High-Income Taxpayers. Under the House Proposal, a 3 percent tax would have been imposed on individual income over $5 million. The Build Back Better Act proposed to impose a 5 percent surcharge on individual income over $10 million and an additional 3 percent on such income over $25 million. For trusts, these income thresholds were significantly lower—the 5 percent surcharge would apply to trusts with income over $200,000, and an additional 3 percent surcharge on income exceeding $500,000.

The Build Back Better Act

In addition to the items noted above, the Build Back Better Act had other provisions of note for individuals in 2022.

1. Increase SALT Deduction Cap. The limitation on the deduction for state and local taxes was proposed to be increased from $10,000 to $80,000. However, the Senate Finance Committee proposed to limit this amount of increased deduction.
2. Retirement Accounts. The Build Back Better Act proposed to prohibit new contributions to a Roth or traditional IRA if the total value of such account exceeds $10 million as of the end of the prior tax year. This prohibition would apply to taxpayers with income over $400,000 for single and married filing separately or $450,000 for married joint filers. The Build Back Better Act also proposed minimum distribution rules for IRAs and defined contribution retirement accounts over $10 million. 50 percent of the amount by which the taxpayer’s prior year account’s total value exceeded $10 million would be required to be made in the current year as a minimum distribution.

Planning Opportunities

The Build Back Better Act preserved grantor trusts, the existing estate tax exemption amounts and the intra-family valuation discount opportunity. Moreover, the powerful long-term (unlimited potential duration) and large amount—also $11.7 million per individual—GST exemption remains in place, thus preserving the very important opportunity to establish a long-term GST trust in a state that allows long-term trusts, such as Wyoming, Delaware and certain other states.

Clients who are considering gifts to irrevocable trusts should do so now while the law allows for grantor trusts, and while the exemption amounts remain high. Clients with existing non-grantor trusts should consult with their estate planning attorneys regarding the proposed surtax, and ways to reduce the potential higher income tax burden. Options may include making distributions to beneficiaries in already-high tax years, and allocation of capital gains from trust principal to income, if the trust permits.