Congressional Democrats are currently debating proposed legislation from the House Ways and Means Committee which, if enacted, would significantly impact estate planning. It is too early to know what tax legislation, if any, will ultimately pass both Houses of Congress and be signed into law in 2021. However, because the proposed effective dates are January 1, 2022 for certain provisions and the date the legislation is enacted for others, the timeframe for planning to take advantage of current law might be short.
Estate Planning Provisions
The proposed legislation includes several provisions related to estate planning, as reflected on the following chart:
Estate, Gift, and Generation-Skipping Transfer (“GST”) Tax Exemptions
Current Law
- $11,700,000 for 2021
- Indexed for inflation through 2025 and then halved in 2026
- Scheduled to be $12,060,000 for 2022
Proposed Legislation
- Halved in 2022 (instead of 2026)
- Would likely be $6,030,000 for 2022
Effective Date
January 1, 2022
Estate Tax Treatment of Irrevocable Grantor Trusts such as SLATs and GRATs
Current Law
Excluded from grantor’s estate for estate tax purposes at death even though taxed to grantor for income tax purposes
Proposed Legislation
Included in grantor’s estate for estate tax purposes at death
Effective Date
- Date legislation is enacted
- Trusts created before the enactment date would be grandfathered, except with respect to funds added after that date
Income Tax Treatment of Transactions with Grantor Trusts (such as a sale or exchange of assets between a Grantor and a Grantor Trust)
Current Law
Transactions with grantor during the grantor’s life are non-taxable
Proposed Legislation
Transactions with grantor during the grantor’s life would be taxable
Effective Date
- The proposed legislation specified that the effective date would be the date the legislation is enacted
- There has been discussion that the effective date might be moved forward to the date the legislation was introduced (September 13, 2021)
- Presumably, transactions with grantor trusts created and funded before the enactment date (or, if the effective date is moved forward, the introduction date) would be grandfathered
Valuation Discounts for Non-Business Investment Assets Owned by Entities such as LLCs
Current Law
Proposed Legislation
Eliminated
Effective Date
Date legislation is enacted
Planning in light of proposed tax legislation
The following is a short, non-exclusive list of planning steps to be considered in light of the proposed legislation:
Use Gift and GST Exemptions in 2021: If an individual has the means and desire to make large gifts, then doing so in 2021 would take advantage of the $11,700,000 exemption. For a married couple with the means and desire to gift up to $11,700,000 but not up to $23,400,000, it might be more favorable for one spouse to use their full $11,700,000 exemption and the other spouse to use no exemption (rather than for both spouses to use just half of their respective $11,700,000 exemptions).
- Complete and Fund Planned SLATs, GRATs, or other Grantor Trusts Soon: The proposed legislation in its current form would effectively eliminate grantor trust planning going forward. Therefore, if a SLAT, GRAT, or other grantor trust is appealing for a particular situation, it might be desirable to complete and fund that trust before the enactment of any legislation.
- Accelerate Plans for Additional Funding of Existing Grantor Trusts: If there is an existing irrevocable grantor trust to which additional future funding is anticipated (such as an irrevocable life insurance trust that qualifies as a grantor trust and has ongoing premium obligations), front loading that additional funding now, before the date of enactment of any legislation, could be beneficial.
- Consider “Late” GST Exemption Allocations: If an irrevocable trust was created and funded in prior years and that trust is not currently GST exempt, a “late” allocation of GST exemption to it (based on current values) before the end of 2021 would take advantage of the current $11,700,000 GST exemption.
We are closely watching legislative developments and remain committed to helping our clients respond to them wisely. Given the compressed time frame and the number of people contemplating actions in light of the proposed tax law changes, we encourage anyone who desires our assistance to contact us as soon as possible. We likewise encourage anyone contemplating gifts before the enactment of any changes to contact their financial advisors early to coordinate funding.
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