Estate Planning Perspective on The House Ways and Means Committee Proposal

Last week, we wrote about some of the tax proposals stemming from the House Ways and Means committee proposal released on Monday September 13th.

At this point the Committee’s proposals are not final and are expected to be adjusted through further debate.  While the proposals are very much fluid, they help provide a framework for changes to US tax policy.

This week, we focus on some of the proposals that may impact estate tax planning.

Estate and Gift Tax Exemptions

The current lifetime federal estate and gift tax exemption is $11.7M per person, or $23.4M for married couples.  This large exemption amount was increased under the Tax Cuts and Jobs Act of 2017 (TCJA) where it was doubled from the previous exemption amount ($5M per person) and adjusted for inflation.  The TCJA is set to expire on 12/31/2025 meaning the estate and gift exemptions would revert to the previously lower amount, $5M per person (adjusted for inflation) on 1/1/2026.  Chairman Neal’s proposal would accelerate this change to 1/1/2022.  The tax rate on assets subject to the federal estate tax would remain at 40%.

  • From a gifting perspective, individuals should consider gifting strategies prior to the enactment of the proposed changes. For example, if a married couple has an estate currently valued at $20M and the federal estate tax exemption is $23.4M ($11.7M for each spouse) there is no estate tax issue.  This new tax proposal would cut the estate exemption in half (adjusted for inflation) to approximately $11.7M combined.  In this case, over $8M would be exposed to the federal estate tax.  It should be noted that gifting away assets to reduce the taxable estate should be comprehensively evaluated prior to execution.

Estate Taxation of Grantor Trusts

The proposal would essentially remove many of the tax benefits of grantor trusts.  It would include grantor trusts in the value of the taxable estate.  Grantor trusts frequently allow for transfer and sale of assets between trusts and grantor and/or third parties.  The new proposal would treat such transfers as a taxable event except for those made to the grantor or the grantor’s spouse.  Further, any change in the grantor trust status would be treated as a taxable event.  The proposal would affect trusts created after the Act or to contributions to grandfathered trusts made after the Act.

  • This would impact many estate techniques currently used based on the flexibility of how grantor trusts can work. Three common examples that would be negatively impacted and essentially stripped of their effectiveness:
    • Grantor Retained Annuity Trusts (GRATs) – we’ve written about these trusts over the last two years. GRATs, if executed properly, essentially allow the grantor to gift away the growth on the principal transferred into the trust.  At the end of the trust term, typically two years, any growth in the account above a certain interest rate is transferred to the next generation and the principal is returned to the grantor.  Under the proposal the transfer of assets to the next generation or non-grantor trust would be treated as a taxable gift equal to the value of the transferred assets.
    • Irrevocable Life Insurance Trusts (ILITs) – typically designed as grantor trusts to own life insurance that is not included in the grantor’s estate. Policy premiums are paid by making gifts to the trust annually. While existing ILITs will be grandfathered in, any future gifts to the trust for premium payments will cause a portion of the death benefit to be included in the grantor’s estate.  New ILITs created after the Act would cause all insurance proceeds to be included in the grantor’s estate.
    • Spousal Lifetime Access Trusts (SLATs) – irrevocable trusts commonly established as grantor trusts for the benefit of a spouse and ultimately the next generation. SLATs typically provide annual distributions to a spouse which are protected for existing trusts.  Under the proposal, new SLATs would create a taxable event upon death of the spouse when assets are transferred to a third party.
    • Finally, even techniques including the swapping of assets in a grantor trust (gaining access to cash, replacing low basis securities with high basis, etc.) would trigger a taxable event.
  • It is important to note that changes to grantor trusts will become effective when the Act is signed into law which could happen before January 1, 2022. This differs from the halving of the estate and gift tax exemption which would become effective on January 1, 2022.


Valuation of Non-Business Assets

A business owner who transfers interest in her closely held, non-publicly traded operating business to an adult child is allowed a discount on valuation for gifting purposes due to a lack of control and marketability of the asset.  The proposal does not intrude on this provision.  The proposal removes any valuation discount for any non-business assets.

  • An operating business also owns $4M of marketable securities. The owner transfers a 25% interest in the business to her daughter.  The proposal would allow a valuation discount for the interest in the operating business, but the share of marketable securities would be valued at a full $1,000,000.

What Remains Untouched?

There are a few areas that remain unchanged by the proposal and highlight how this proposal is different from the original Biden proposal:

  • The estate tax rate remains at 40%. It was previously rumored to increase to something in the neighborhood of 45%.
  • Notably, the step-up in basis at death remains in place.
  • The annual gift exclusion remains at $15,000 per person.
  • There are no changes to the generation skipping tax (GST)
  • The gift tax exemption remains unified with the estate tax exemption (no decoupling will occur under this proposal).

A Call to Action

While the details of the proposal have not been finalized and Congress will continue to debate the provisions it’s important to think about how these potential changes will impact your planning.  While there is still time to plan the window is tight.  Most of the final changes will become effective when the Act is signed into law, and this is likely to happen before the end of 2021.  We encourage you to think about what’s most important to you and your families when it comes to making estate planning decisions.  We welcome the opportunity to help you through this process.

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