Time-Sensitive and Important Estate, Gift, and Tax Planning Reminder

On September 12, 2021, the House Ways and Means Committee (the “Committee”) released details regarding its draft of the budget reconciliation bill.  FVLD has been following the various proposals and our earlier review of potential changes can be found in our June 2021 Newsletter.  Although the final form of the changes will not be known until a bill is enacted, some changes will likely become effective when the bill is signed or perhaps as early as introduction of the bill – not the first of the year.  Because of the time-sensitive nature of the opportunity to take action, we wanted to alert you to some of the key details of the Committee’s proposal.

Key Transfer and Estate Tax Proposals

Reduction of Estate and Gift Tax Exemption.  In 2017, the Tax Cuts and Jobs Act doubled the estate and gift tax exemption to an amount that is now $11.7M per individual; $23.4M per couple. This is set to expire on December 31, 2025.  Upon expiration, the exemption will return to approximately $6M.  The Committee proposal moves up the expiration date to December 31, 2021.  If enacted, far more individuals and couples will be subject to federal estate taxes, and 2021 may be a last chance year to make high value gifts without gift or estate tax.  Clients may want to consider strategies to make tax-exempt gifts before this proverbial window closes, including a spousal lifetime access trust, also known as a “SLAT.” 

Changes to Treatment of Grantor Trusts.  Under the current rules applicable to Grantor trusts, the creator of the trust, not the trust itself, pays the income taxes on trust assets.  The effect is that a trust can grow faster, and the grantor can remove additional assets from his or her estate.  The Committee’s proposal changes the rules that apply to grantor trusts so that the assets in new grantor trusts or added to old grantor trusts would be taxed on the death of the trust creator as a part of that person’s estate.  The proposal would also treat sales between grantor trusts and their deemed owner as taxable transactions, thereby eliminating a key method of moving asset growth into the next generation without a gift tax.

Implications for Life Insurance Trusts.  For grantor trusts that hold life insurance policies payable on the death of the grantor, proposed changes to the grantor trust rules may have significant impact.  This is because certain premium payments made on the life insurance policies would be considered additional contributions to the trust and would be subject to tax.

Modifications to Estate Tax Valuation Rules.  The Committee’s proposal would change the valuation rules to ignore discounts for partial ownership or lack of control of certain assets in determining the value for transfer tax purposes.  This will likely become effective for transfers made after the date of enactment.

Key Income Tax Proposals

Increase in Individual Tax Rates.  The proposal would increase the top marginal individual income tax rate to 39.6%, and would apply to married individuals filing jointly with taxable income over $450,000, unmarried individuals with taxable income over $400,000, and estates and trusts with taxable income over $12,500.

Increase in Capital Gains Rate.  For certain “high” income individuals, the Committee has proposed to increase the capital gains rate to 25%.

Changes to Stock Sales.  Currently, 100% of up to $10M of gain from the sale of qualified small business stock may be excluded from gross income.  The Committee proposal would reduce the excludable amount to 50% for most qualified small business shareholders.

The Committee’s proposals are a part of the negotiations in a much larger bill; however, it does appear likely that there will be changes enacted as part of the budget reconciliation process this year.  The proposed actions have driven some clients to move forward on planning and making gifts.  We will continue to monitor the negotiations in Washington and will provide updates as the proposals solidify.  Please be aware, however, that some planning opportunities may be eliminated on very short notice.  If you have been contemplating estate planning or gifts in 2021, then we recommend talking to your advisors or FVLD contact sooner rather than later, especially because some of the changes will likely go into effect on enactment rather than next year.