On September 13, 2021, the House Ways and Means Committee formally released its proposed tax provisions to be incorporated into the broader budget reconciliation bill it hopes will pass in the near future (the “Tax Proposal”). The Tax Proposal includes a number of corporate and individual tax increases and changes. This summary focuses on certain of those provisions related to gift and estate tax planning.
While this is only proposed legislation, and some provisions may change materially or ultimately be eliminated before becoming law, many of the provisions likely to survive are slated to become effective at the time the law is enacted. Those considering gift and estate tax planning, particularly with “grantor trusts” as described below, should act now.
Below are the key takeaways from the Tax Proposal related to gift and estate tax planning, including relevant effective dates:
· Decreases Gift, Estate and GST Tax Exemptions to $6.02M. Gift, estate and generation-skipping transfer tax exemptions would be reduced from the current amount of $11.7M per person ($23.4M per married couple) in 2021 to $6.02M per person ($12.04M per married couple) in 2022 (subject to an annual inflation adjustment). Effective as of January 1, 2022.
· Significantly Reduces Tax Planning Opportunities Using “Grantor Trusts.” The Tax Proposal would severely limit the use of common estate planning techniques involving “grantor trusts.” A “grantor trust” is a trust that is taxed for income tax purposes to the person who created and funded the trust (the grantor). This status allows the grantor to (i) pay the income taxes personally for the trust without it being deemed an additional gift to the trust and (ii) to transact with the trust without income tax consequences. The new law would effectively eliminate the use of new grantor trusts in estate planning by (i) requiring grantor trusts to be included in a grantor’s taxable estate upon death, (ii) treating a distribution from a grantor trust or termination of grantor trust status as a gift from the grantor, and (iii) recognizing certain transactions, including sales, between the grantor and the grantor trust for income tax purposes. These changes may also severely impact commonly used estate planning techniques such as the use of Life Insurance Trusts, GRATs, SLATs, and QPRTs. Effective for trusts created and/or assets contributed on or after the date of enactment.
· Eliminates Valuation Discounts for Certain Transfers of Nonbusiness Assets. Valuation rules would be amended to prevent a taxpayer from claiming a valuation discount for gift and estate tax purposes when transferring “nonbusiness assets.” Nonbusiness assets are passive assets not used in the active conduct of a trade or business. Effective for transfers made after the date of enactment.
· Increases Capital Gains Tax Rate for High Earners. The Tax Proposal would increase the top capital gains rate for individuals as well as for trusts and estates from 20% to 25% and add a 3% surcharge for individual taxpayers with income over $5 million. This means the federal capital gains rate could be as high as 31.8% (including the 3.8% Medicare tax). Effective date for increased capital gains rate is retroactive to transactions after September 13, 2021; effective date for the 3% surcharge is for taxable years beginning after December 31, 2021.
· Increases Ordinary Income Tax Rate for High Earners. The Tax Proposal would increase the top federal ordinary income tax rate from 37% to 39.6% for individuals, trusts and estates and add a 3% surcharge for individual taxpayers with income over $5 million. This means the federal ordinary income tax rate could be as high as 46.4% (including the 3.8% Medicare tax). The proposed top bracket would start at taxable income levels of $400,000 for single individuals ($450,000 for married individuals filing jointly). Effective date is for taxable years beginning after December 31, 2021.
Now is the time to act to lock in some of the current gift and estate planning techniques that may not be available only a few weeks from now.