News Alert: Proposed Federal Tax Law Changes
Proposed Tax Law Changes and Potential Impact on Trusts and Estates
On September 13, 2021, the House Ways and Means Committee released its proposed tax plan to fund the Biden administration's Build Back Better Act spending package. The legislative future of these proposed tax law changes is currently far from clear. Key components of the proposed tax plan that would affect trusts and estates are briefly summarized in this news alert.
Reduction in the Federal Estate and Gift Tax Exemption
Effective Date: January 1, 2022
The current estate and gift tax exemption applicable to transfers made during life or at death is $11.7 million per person ($23.4 million per married couple), which under current law will be reduced as of January 1, 2026 to $5 million per person ($10 million per married couple), adjusted for inflation. Under the proposed tax plan, the exemption will be reduced as of January 1, 2022 to $5 million per person ($10 million per married couple), and when adjusted for inflation will result in an exemption of about $6.02 million per individual ($12.04 million per married couple).
Reduction in the Federal Generation-Skipping (GST) Tax Exemption
Effective Date: January 1, 2022
The exemption from the GST tax during life or at death mirrors the estate and gift tax exemption and will be reduced similarly under current law on January 1, 2026. Under the proposed tax plan, the GST exemption will also be reduced early such that as of January 1, 2022, the GST exemption would be about $6.02 million per person.
Increased Income Tax Rates
Effective Date: September 13, 2021
The proposed tax plan would increase the highest capital gains tax rate from 20% to 25%.
Effective Date: January 1, 2022
The plan also would increase income tax rates on trusts and estates, subjecting trusts and estates to a 3% surcharge on taxable income in excess of $100,000.
Grantor Trusts
Grantor trusts that are established or funded after the enactment of the proposed tax plan would be (i) includable in the grantor's gross estate for federal estate tax purposes, valued as of the grantor's date of death; and (ii) distributions from such a grantor trust to someone other than the grantor or the grantor's spouse, or which discharges an obligation of the grantor, will be treated as a taxable gift from the grantor on the date of distribution. As to all grantor trusts, no matter when established or funded, the proposed tax plan would (i) treat the termination of the grantor trust status of the trust during the grantor's lifetime as a taxable gift of the trust assets (or the applicable portion) on the date of the change; and (ii) cause recognition of capital gains or losses on sales and exchanges between a grantor and a grantor trust because such transactions will no longer be disregarded for income tax purposes. Some common grantor trusts that will likely be impacted if this plan passes include irrevocable life insurance trusts, grantor-retained annuity trusts, spousal lifetime access trusts and qualified personal residence trusts.
Elimination of Valuation Discounts on Non-active Business Assets
Effective on Date of Enactment
The proposed tax plan would eliminate valuation discounts for lack of control and lack of marketability for minority interests in closely held entities made up of passive assets held for income production rather than an active trade or business.
If you have any questions about how the proposed tax plan may affect your estate plan or are interested in making changes to your plan, please contact us. Kanner Baker will provide further information if the proposed legislation becomes law.
The above information is current as of October 13, 2021.