Throughout the year we have been monitoring and communicating about the various discussions regarding potential tax law changes. Although there have been a lot of proposals put forth, we have a little more clarity as the House Ways and Means Committee has forwarded a “bill” (not law) to be considered by the full house that gives us some indication as to what the final law may be. It is important to understand that this is not the law and is subject to change.
What is concerning about this bill is that some of the changes may take effect upon enactment (when the bill becomes law) so it is urgent that you review your situation and any existing estate plan with an estate planning attorney as soon as possible to see how these laws may affect you and what should or could be done in this potentially very short window of time to take advantage of planning techniques that may not be available soon. The following is a summary of the sections most relevant to estate planning:
- A proposal to reduce the estate tax exemption from $11.7M to the 2010 level of $5M per individual, indexed to inflation. (This reduction was to be effective on 1/1/2026, but is now being proposed to become effective 1/1/2022);
- Any transfers to “Grantor” trusts typically designed to make sure the assets in the trust at the time of death will not be included in the estate for estate tax purposes will now be included in the estate of the grantor at the time of death. Also, any “sales” to a grantor trust will trigger a capital gain. This law is to take effect upon enactment. This will have a dramatic effect on some of the traditional estate tax freezing techniques:
- Sales to Intentional Grantor Trusts (IGTs) or Beneficiary Defective Inheritor’s Trusts (BDITs)
- Gifts made to IGTs, BDITs
- Transfers to Grantor Retained Annuity or Uni-Trusts (GRATs and GRUTs);
- Transfers to Qualified Personal Residence Trusts (QPRTs):
- Valuation rule changes to remove valuation discounts for transfer tax purposes for “passive assets” that are held for the production of income not used in active conduct of a trade or business;
- Several rules for Mega IRAs ($10M and over) for high income earners forcing accelerated required minimum distributions and limiting Roth Conversions;
- Increased highest income tax bracket back to 39.6%; and
- Increase Capital Gain Rate for Certain High-Income Individuals to 25%.
Click here to read the full summary released by the House Ways and Means Committee.
What is absent from the bill is the Biden Administration’s proposal to do away with a step-up in basis on death and the realization of a capital gain tax on inherited property.
Please note that there have already been discussions regarding further clarification and correction of errors. Everything here is subject to change, but this bill at least gives us a glimpse of what may be coming soon.
One thing is certain: you should contact your estate planning attorney to discuss updating your estate plan. This is especially critical those individuals with an estate of over $5M. In order to take advantage of many of the estate planning techniques used for the past several decades, you will need to contact an estate planning attorney immediately to see if any planning is advised or feasible before the law changes. As this could be just a matter of weeks, any planning which needs to be done will most likely need to be accomplished very quickly in order to be effective, so act now and speak with an estate planning attorney if you think this change may affect you and your planning.
To learn more about how we can help you and your family take advantage of this window for estate planning strategies or about how we can help you to have peace of mind through holistic estate planning, visit our website, explore our blog, and schedule your complimentary consultation today!