Last week, the House Ways and Means Committee proposed tax legislation to fund the President's $3.5 trillion reconciliation bill, which includes measures related to climate change, family aid, and expansions to Medicare. This "Build Back Better" legislation addresses corporate, international, and individual income tax changes and changes to the gift and estate tax laws. As it moves through the legislative process, the proposal may be revised. Altman & Associates, a division of Frost Law, is paying close attention to the proposed changes - particularly those that would affect the current gift and estate tax laws.
As proposed now:
Under the Trump Administration, in 2017, the estate tax exemption doubled to $11.7 million for single individuals and $23.4 million for married couples. While subject to reduction in 2026, the new proposal drops the basic exemption rate to $5.85 million, increasing yearly by an inflation factor. It would be effective for gifts and death tax as of January 1, 2022.
The legislation proposes to eliminate the estate planning benefits of irrevocable grantor trusts. Many irrevocable trusts are set up to be grantor trusts, so the creator or settlor of the irrevocable trust is still taxed on the income of the irrevocable grantor trust. If this change is enacted, irrevocable grantor trusts will now be included in the deceased's estate based on the value of the assets at the time of the Grantor's death. Any distributions made during the grantor's lifetime to anyone other than the grantor or their spouse will be treated as a taxable gift on the date of distribution. Should the grantor trust status of the irrevocable trust be terminated, the grantor would be making a taxable gift on the trust assets. The current proposed legislation "grandfathers" any irrevocable grantor trusts established before the enactment of the legislation. Therefore, unless further contributions after enactment, are made to the irrevocable grantor trust, the current proposed legislation will not apply to existing irrevocable grantor trusts. However, the future use of irrevocable grantor trusts may become irrelevant. Should the legislation be enacted in its current proposed form, the creation and full funding of an irrevocable grantor trust should occur immediately. And, if the grantor wishes to sell assets to the irrevocable grantor trust or substitute assets inside the irrevocable grantor trust, this should also occur immediately. Finally, if you have an existing irrevocable grantor trust and make annual gifts (capped at $15k) to the trust, make your 2021 annual exclusion gifts now and then arrange for 2022 and beyond.
Non-grantor irrevocable trusts, considered separate income taxpayers, will be subject to the same increase in tax rates as individuals in the highest income tax bracket. The top income tax rate is subject to change from the current tax rate of 37% to 39.6%, effective January 1, 2022. The top income tax rate for long-term capital gains will rise from 20% to 25%. Trusts and estates with income over $100,000 will be subject to a 3% surcharge on capital gains, which will also apply to individual taxpayers, whether single or married, with incomes over $5 million.
Under the proposed legislation, the opportunity to claim valuation discounts when a taxpayer transfers certain business interests that own non-business assets would be eliminated. Non-business assets are considered cash, stocks, bonds, and real property with a few exceptions, and all assets transferred will be taxed at full market value after enactment of the legislation.
Our estate planning team can help you prepare for the upcoming changes and update your estate plan. Schedule an appointment today!