Proposed Legislation Affecting Estate Taxes and Gift PlansNovember 11, 2021
On September 13, 2021, the House Ways and Means Committee released statutory language for its proposed tax plan, which seeks to increase various taxes and eliminate certain wealth shifting strategies commonly used in estate planning, in order to fund a large portion of the Biden administration’s $3.5 trillion spending plan.
Despite knowing what the proposed changes are, there continues to be widespread uncertainty as to when the proposals, if adopted as law, would apply. While many of the proposed changes are intended to be effective as of January 1, 2022, some critically important provisions to estate planning are pegged to become effective on the “date of enactment,” whenever that may be. Here, we focus narrowly on the two proposals that would have the most significant impact on many of our clients and would restrict certain estate planning techniques that have been the cornerstone of estate planning, specifically (1) potential reductions of the estate, gift and generation skipping transfer (“GST”) tax exemptions and (2) elimination of grantor trusts.
Reduction in Estate, Gift and GST Exemptions
As of January 1, 2021, the amount of wealth that can be transferred by an individual at death or during lifetime without triggering any federal estate, gift or GST tax is $11.7 million (“exemption”). Although the existing legislation pertaining to the federal exemption includes a sunset provision that provides for the federal exemption to revert back to $5.6 million on January 1, 2026, the House proposal accelerates the 2026 reduction to 2022, and reduces the exemption to an inflation adjusted amount of about $6.2 million in 2022.
In order to take advantage of the current exemption, before it is reduced by nearly half, wealthy clients who have not yet used their exemptions are encouraged to act immediately to determine whether making substantial gifts before the end of 2021 is appropriate. This requires careful review and consideration of many factors. If you are certain that you will never need the gifted assets and will be able to maintain financial independence without the assets and the income they may generate, then making gifts before the end of 2021 is something that you may want to consider.
Elimination of Grantor Trusts
A “grantor” trust is a popular planning technique whereby an individual (“grantor”) gives assets to an irrevocable trust and continues to exercise some degree of control over the gifted assets. Under current law, assets gifted to a grantor trust may be removed from the grantor’s estate at death; however, the grantor continues to pay the income taxes on any income earned on the gifted assets, thus further reducing the grantor’s taxable estate during his or her lifetime. Under the House proposal, the new rule would effectively eliminate the use of newly created grantor trusts by subjecting grantor trusts created after the date of enactment to inclusion in the grantor’s estate at death.
Although existing grantor trusts could be “grandfathered” under current law, the new rule would effectively ban additional contributions to existing grantor trusts, such as insurance premium gifts and ongoing transactions between the grantor and the trust. The proposed law would subject a portion of such existing grantor trusts to estate tax at the grantor’s death if any contributions or transfers are made after the date of enactment; and to gift tax if any distributions are made to the trust’s beneficiaries during the grantor’s lifetime. For clients who still need to pay premiums on policies owned by existing life insurance trusts, the House Proposal’s change to the grantor trust rules would present a significant challenge.
On October 28, 2021, President Biden released his framework for the Build Back Better Act, which, notably, did not include any of the estate tax or grantor trust changes that were included in the tax plan proposed by the House Ways and Means Committee. Despite the non-inclusion of such changes in President Biden’s framework, clients should not rest easy, as it is possible that some or all of these proposals could be added back in the final version of the Act that may be voted into law.
At this time, we, nor Congress or anyone else knows if any tax legislation will pass and if so, when it will happen or what changes it will include. However, we recognize that if and when the House proposals become effective is critical to determining if you have time to plan, and how much time you have to execute that plan before the law changes. In light of the present uncertainty, we suggest reaching out to your Hinckley Allen attorney to review how this could impact your plan. We will continue to monitor for developments.
For more information, please contact our attorneys and learn more about our Trusts & Estates practice.