Proposed Legislation Targets Estate and Gift Tax Planning

On September 12, 2021, the House Ways and Means Committee introduced a series of proposals to be included in President Biden’s $3.5 million budget reconciliation bill known as the Build Back Better Act. If passed into law, these proposals would significantly impact the opportunities for estate and gift tax planning that exist under the current framework. The changes would include the following:

Opportunities for Estate and Gift Tax Planning

  1. Reduction in Gift, Estate, and Generation-Skipping Transfer (“GST”) Exemptions: The proposed bill would reduce the federal estate, gift, and GST exemptions from the current $11.7 million per person to $5 million per person (indexed for inflation) for decedents dying, or gifts made, after December 31, 2021.
  2. Changes in Rules for Grantor Trusts: The proposed bill would largely eliminate current planning opportunities involving grantor trusts by 1) including grantor trusts in the grantor’s taxable estate at death; 2) treating lifetime distributions from grantor trusts as taxable gifts of the trust assets; 3) treating the termination of grantor trust status as taxable gifts of the trust assets; and 4) requiring the recognition of gain on sales of assets between a grantor and a grantor trust. These changes would be effective for trusts created and transfers made after the date of enactment.    
  3. Disallowance of Valuation Discounts for Nonbusiness Assets: Under the proposed legislation, no valuation discounts would be permitted for certain transfers of interests in entities that hold “nonbusiness” assets. For purposes of this rule, nonbusiness assets are those that are not used in the conduct of an active trade or business. The rule would apply with respect to all transfers made after the legislation becomes law. 
  4. Increased Tax Rates for Trusts and Estates: The proposed bill would increase the top marginal tax bracket for estates and trusts from 37% to 39.6%. In addition, trusts and estates with income over $100,000 would be subject to a 3% surtax based upon the entity’s modified adjusted gross income.  

It is important to recognize that we are still in the initial stages of the legislative process and that these proposals may be seen as a starting point for a discussion of what changes will ultimately be made. It is impossible to state with any degree of certainty what provisions might be included in a final version of this bill. For now, individuals who might be impacted by these proposed changes might wish to consult their advisors to discuss what opportunities might be currently available before any new legislation comes to fruition.  

We will continue to monitor developments as these proposed changes move through the legislative process.  Additional articles and analyses will be provided in the coming weeks.  In the meantime, if you have any questions, please reach out to your Schneider Downs tax consultant or contact us at [email protected].

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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