Last week, the House Ways and Means Committee released its proposed tax plan to fund the $3.5 trillion “Build Back Better” reconciliation program. While this proposal is less drastic than the 99.5% Act released by Senator Sanders in March of this year, it does contain significant tax increases and changes to the estate tax and gift laws. Although this is just a proposal at this point, we do anticipate a new law prior to year-end. Certain strategies that have been used by estate planning attorneys for many years may become ineffective or have their impacts significantly reduced. There is still an opportunity to benefit from these strategies, however, that door may be quickly closing. For anyone who may be impacted by these changes, the time to act is now. Below is a high-level summary of some of the proposed changes:
- Estate, Gift and Generation Skipping Transfer Exemptions. Under current law, the base estate, gift and generation skipping transfer tax exemption is $10 million (inflation adjustments cause this number to rise each year – the exemption in 2021 is $11.7 million). The proposal would cause the base exemption to be reduced to $5 million. The estate tax rate was not addressed in the proposal which indicates that it will remain at 40%. The change would be effective on January 1, 2022.
- Grantor Trusts. Many of the most powerful estate planning techniques revolve around the use of Grantor Trusts. Grantor Trusts include grantor retained annuity trusts (GRATs), spousal lifetime access trusts (SLATs), individual life insurance trusts (ILITs), intentionally defective grantor trusts (IDGTs), and beneficiary defective inheritance trusts (BDITs). Benefits of Grantor Trusts include allowing the creator of the trust to: (i) remove assets (and the future appreciation of the assets) from his or her gross estate, (ii) pay the income tax generated by the trust assets without incurring additional gift tax, and (iii) sell assets to the trust with no income tax consequences. The proposed bill would essentially eliminate all of these benefits, thus significantly eliminating their use. ANY ASSETS TRANSFERRED TO A GRANTOR TRUST PRIOR TO THE DATE THE BILL PASSES INTO LAW WOULD BE GRANDFATHERED INTO THE OLD LAWS AND ALL OF THE ABOVE BENEFITS WOULD STILL APPLY.
- Valuation Discounts. Historically, clients would be able take advantage of valuation discounts when they transferred non-controlling and non-marketable interests in closely held entities. Valuation discounts will no longer be permitted except for entities that are active operating businesses.
- Individual Income Tax Rates. Beginning on January 1, 2022, the top marginal rate would increase to 39.6% (from 37%). This would apply to joint filers with more than $450,000 of income or individual filers with more than $400,000 of income.
- Capital Gains Rates. The capital gains rate would be increased from 20% to 25%. This rate would be applied to any sale taking place after September 12, 2021 (unless the seller had a binding contract entered into before that date and the sale occurs by year-end).
- Corporate Tax Rates. Starting next year, the 21% flat rate on corporate income will be replaced with a graduated rate. The new rates would be 18% on income up to $400,000; 21% on income between $400,000 and $5 million; and 26.5% on income over $5 million. In addition, corporations with income in excess of $10 million will not be subjected to the graduated rate scale and instead be taxed at a flat rate of 26.5%.
Again, these are just proposals at this time, and nothing is set in stone. Having said that, it is important to evaluate your options, especially while the transfer tax exemptions remain at all-time highs. Please reach out to me if you are concerned about what these changes might mean for you and your family. There is still time to take advantage of the current laws while they are in force. Although we cannot predict what the final law will look like, there seems to be strong momentum to implement the above-described changes in the near future.
We look forward to speaking to you.