UPDATE 2 (11/4/2021)

The House Committee on Rules published a new version of the reconciliation bill, H.R. 5376. The latest draft is 2,135 pages. As with the October 28 draft, provisions related to the estate, gift, and generation-skipping transfer taxes are conspicuously absent. This means grantor trusts, such as Grantor Retained Annuity Trusts (GRATs), Spousal Lifetime Access Trusts (SLATs), and Irrevocable Life Insurance Trusts (ILITs) remain safe for the moment, as do dynasty trusts, valuation discounts, and basis step up (or down) at death.

UPDATE (10/28/2021)

Have changes to the federal estate, gift, and generation-skipping transfer taxes fallen off the radar screen?

At 9:00 AM this morning, the White House issued its proposed framework for the Build Back Better Act. The press release includes a summary of the “offsets” that the Act would use to fund the spending plan. The items mentioned in the framework are as follows:

  • 15% Corporate Minimum Tax on Large Corporations
  • Stock Buybacks Tax
  • Corporate International Reform to Stop Rewarding Companies That Ship Jobs and Profits Overseas
  • AGI Surcharge on the Top 0.02%
  • Close Medicare Tax Loophole for Wealthy
  • Limit Business Losses for the Wealthy
  • IRS Investments to Close the Tax Gap
  • Prescription Drugs: Repeal Rebate Rule

The framework makes no mention of changes to the estate, gift, or generation-skipping transfer taxes.

Later in the day, the House Committee on the Budget released the updated text of the reconciliation bill. At 1,684 pages, it will take some time to digest. However, a quick search of the document reveals no references to the estate, gift, or generation-skipping transfer taxes. Moreover, there are no references to the proposed grantor trust rules mentioned in the original post.

This is not the final text of the bill, and changes are likely. Whether those changes will involve the estate, gift, and generation-skipping taxes remains to be seen.

Original Post (9/14/2021):

Significant changes are coming to the federal estate and gift taxes if the House Ways and Means Committee gets its way.

On Monday, September 13, the committee released an 881-page bill in which it lays out its proposed tax changes. Among these is a reduction in the estate tax basic exemption amount to its pre-Tax Cuts and Jobs Act level, namely $5 million, indexed for inflation. Although some planners have previously expressed concerns about such a reduction being retroactive to the beginning of the year, under the committee proposal the effective date is January 1, 2022. Section 138207.

The bill would also increase the top marginal income tax rate to 39.6%, including for trusts and estates. Currently, the top bracket is 37%, which applies to the taxable income of trusts and estates in excess of $13,050. Section 138201.

The bill would impose a 3% surcharge on a taxpayer’s modified adjusted gross income (MAGI) that exceeds a certain threshold. For trusts and estates, the threshold is only $100,000. This would make the inclusion of capital gains in distributable net income (DNI) even more important. Section 138206.

Also, the bill would eliminate estate and gift tax valuation discounts for nonbusiness (i.e., passive) assets. This rule would apply to transfers occurring after enactment of the act, rather than being delayed until January 1, 2022. Section 138210.

Moreover, the bill would dramatically undermine the usefulness of grantor trusts in estate planning. It adds new chapter 16,Special Rules for Grantor Trusts, to Subtitle B (Estate and Gift Taxes). Under the new rules:

    • Grantor trusts would be included in the grantor’s estate at death.
    • Transfers from grantor trusts during the grantor’s lifetime, other than to the grantor’s spouse, would be treated as gifts.
    • A gift would be deemed to have occurred if grantor trust status terminates during the grantor’s lifetime.
    • Sales to grantor trusts would no longer be disregarded; i.e., they would be recognition events.
    • Notably, these rules would apply to trusts created after the date of enactment, as well as to contributions after the date of enactment. Section 138209.

The last two items, related to valuation discounts and grantor trusts, appear to be inspired by S. 994, For the 99.5 Percent Act, which Sen. Bernie Sanders introduced in March. However, other troubling elements of S. 994, such as reduction of the estate tax exemption to $3.5 million, reduction of the gift tax exemption to $1.0 million, and taxation of dynasty trusts after 50 years, are conspicuously absent from the House Ways and Means Committee proposal.

For high net worth clients, the proposal reinforces the need to establish–and, just as importantly fund–the proper estate planning vehicles before the end of the year. Or, in the case of planning that involves grantor trusts, including spousal lifetime access trusts (SLATs) and dynasty trusts, even sooner.

Posted by Joel D. Roettger, JD, LLM, EPLS