By Robert Cooper

The biggest question today in the estate planning world is what dollar amount of assets may be passed tax-free after January 1, 2022, to next-generation family members. The House Ways and Means Committee has released an extensive tax package proposing significant changes which we think make it important for couples whose net worth exceeds $12 million to consider making planning changes before year end.

The proposed changes in the law would decrease the current $11.7 million per individual exemption amount (a combined $23.4 million for married couples) to approximately $6.2 million per individual amount ($12.4 million per married couple). This provision would apply to individuals who die after December 31, 2021, and to gifts made after December 31, 2021. Individuals who want to take advantage of the current exemption would have to make gifts by the end of 2021 to take advantage of the $11.7 million exemption. For those with sufficient assets and who want to maximize the tax benefit, this would allow gifting roughly $5.8 million by the end of 2021 individually or about $11.6 million for a married couple. There is no mention of the elimination or modification of portability (which allows a surviving spouse to use any unused estate and gift tax exemption after the deceased spouse’s death).

Nor does the proposed tax change adopt what President Biden had requested, which was eliminating the step up in basis for assets upon an individual’s death. The existing tax rules permit a step up in basis for assets to their current fair market value from their original cost, which means the beneficiaries who receive the appreciated assets do not have to pay income tax on this gain in value.

There are also several proposed changes to the grantor trust rules which will affect many of the most popular estate planning grantor trusts (i.e., a trust created by an individual or couple who transfer their assets into the trust and retain the benefit of trust income during their lifetime). First, upon the death of a grantor, the assets contained in the grantor trust will be considered as part of the decedent’s taxable estate when the decedent is the deemed owner of the trust.

Second, transfers of property between grantor trusts and their deemed owner will be treated as equivalent to transfers between the owner and a third party (i.e., a sale) and would result in income tax on the amount the assets have appreciated since their purchase.

Third, distributions from a grantor trust to anyone other than the grantor or grantor’s spouse would be treated as a taxable gift.

Finally, if a grantor trust becomes a nongrantor trust during the lifetime of the grantor (i.e., someone other than the grantor becomes the trustee or the grantor gives up the right to receive trust income), the assets of the trust are considered gifted by the grantor to the non-grantor trust at that time.

If these proposals become law, they will affect many popular estate planning techniques which allow a taxpayer to reduce assets taxable as part of the grantor’s estate while still being able to control how the assets are used. These techniques involve grantor trusts such as Spousal Lifetime Access Trusts, Irrevocable Life Insurance Trusts, Grantor Retained Annuity Trusts and Qualified Personal Residence Trusts. The proposed rules only apply to trusts created and transfers made after the date of enactment of the proposed rules. If you are considering creating any of these specialized trusts, it would be wise to do so before the President signs any new tax change into law in case the law is given immediate effect before January 1, 2022.

Finally, the proposed rules would eliminate the valuation discount for certain transfers of nonbusiness assets to limited liability companies, partnerships and other private entities. Non-business assets are passive assets which are held for the production of income and not used in the active conduct of a trade of business. The proposed rule would apply to transfers after the date of enactment.

The window is quickly closing for higher net-worth individuals to make changes and implement the popular estate planning strategies currently used to minimize estate tax liability. Once the legislation has passed, the window will be closed.

Contact us if you feel that you want to discuss your planning in more detail. We expect to be busy through December 31, so the sooner you start, the better