As we welcome another year, we wanted to share some observations with you from the wealth planning side of our estate planning practice.
As is often the case, and all the more frequently when the governing party in Washington, DC, changes, we were inundated last year with information about what changes might be forthcoming in the tax law, and faced with the dilemma of weighing competing proposals, and guessing (discerning) when a proposal might seem sufficiently likely to become law that it warrants our development of some form of guidance to our clients.
In the latter part of 2021, we spent a considerable amount of time following the various proposals in Biden’s Build Back Better bill. The original version of the bill had a pretty hefty price tag, and accordingly spurred designs to raise more revenue in order to pay for the planned expenditures. In September theU.S. House Ways and Means Committee released a draft of proposed changes to the federal tax code, including significant changes affecting trusts, estates, gifts, and tax rates, among other proposals. However, as it became increasingly clear that moderate Democrats in the Senate wouldn’t support all the proposed expenditures and tax reforms in the initial bill, a second version, and then a third version, of the bill were subsequently proposed. As the scope of reforms targeted in updated versions of the bill was narrowed, the price tag was lowered, and many tax reform proposals were dropped. The third version of the bill was passed by a vote of 220-213 in the House of Representatives on November 19, 2021, though it still faces an uphill battle to be passed in the Senate.
In the initial bill, there were three reform proposals that were particularly pertinent to estate tax planning efforts. While each of these has since been stripped from the bill, we believe it warrants a brief discussion of these proposals, inasmuch as it shows where lawmakers might look to again to raise revenue in the future.
- First, it was proposed to cut the estate tax exemption (and the gift tax exemption and the generation-skipping tax exemption) in half, effective January 1, 2022. This represented an acceleration of that decrease, already baked into existing law, from 2026 to 2022.
- Second, there were a number of reforms proposed that would change the treatment of “Grantor Trusts” (and make their use much less favorable to high net worth individuals seeking to minimize their exposure to estate taxes). The proposals would not impact the use of Revocable Trusts to avoid probate, but would impact the use of the many (alphabet soup) varieties of Irrevocable Grantor Trusts – SLATs, GRATs and ILITs among them. Under the changes proposed in September, assets transferred to a Grantor Trust established or funded after the new law is enacted would be subject to possible (1) inclusion in the grantor’s estate for estate tax purposes and (2) recognition events for income tax purposes. Pre-existing Grantor Trusts might be “grandfathered,” but future gifts to those existing Grantor Trusts would undermine the grandfathering, in perhaps difficult to calculate ways.
- Third, those September proposals also called for the elimination of lack of marketability and fractional interest valuation discounts for interests in entities owned at death or gifted during a transferor’s life when such entities own nonbusiness, or passive, assets.
If these proposals had passed, it would have represented a lot of significant changes – the closing of “loopholes” (we might prefer to call them planning opportunities) that our clients have had every right to take advantage of.
Of course, each version of the Build Back Better bill (including the one passed in the House and currently pending in the Senate) also included numerous proposed changes to income tax rules and rates.
While the primary proposals we were watching above have been removed (for now) from the bill, we are not yet prepared to breathe a collective sigh of relief; there is still potential for significant tax law changes “blowing in the wind,” and we would caution our clients that it is no time to be complacent.
If you feel exposed to estate taxes, if you have a projected taxable estate north of $6M (or, if married, north of $12M), we want you to call us and have a renewed discussion of how you can best achieve your goals.
Of course, we already advise our clients to come and see us (or set up a Zoom conference) whenever changes in personal circumstances, or whenever changes in the law, make review appropriate (or make failure to review potentially costly).
In our offering of some guidance to you in this email, we would be remiss in not identifying a primary source – namely an article found here, which you may wish to peruse if you desire a more thorough analysis of some of the issues addressed above (and a discussion of some of the proposed income tax law changes, which is beyond the scope of this correspondence).