Proposed Legislation Could Directly Impact Year-End Estate Planning

October 13, 2021

On September 25, 2021, the House Budget Committee released the Build Back Better Act containing a variety of proposed changes to the Tax Code. Several of the Act’s provisions could directly impact your year-end estate planning and are summarized below. Our estate planning attorneys are available to discuss these proposed changes and how their tax implications could affect or completely eliminate certain strategies you may intend to implement.

Estate Tax / Gift Tax / Generation-Skipping Transfer Tax

The exemption against estate, gift and generation-skipping transfer (GST) tax is currently $11.7 million per person ($10 million per person, indexed for inflation through 2025). This increased exemption amount is scheduled to sunset after December 31, 2025 to $5 million per person (indexed for inflation from 2011). The current proposals would accelerate the sunset to December 31, 2021 and reduce the exemption amount to approximately $6.02 million beginning on January 1, 2022.

Planning Before Year-End: For clients who have not maximized their $11.7 million gift tax exemption, it is important to take advantage of the current exemption amount by making lifetime gifts before the end of the year up to maximize amount allowed.

Grantor Trusts

A “grantor trust” is a trust of which the “grantor” is treated as the owner for income tax purposes, often with trust property removed from the grantor’s estate for estate tax purposes. The new proposals would eliminate many of the tax benefits of establishing grantor trusts, including:

  • Assets owned in a grantor trust at the time of the grantor’s death would be included in the grantor’s estate for estate tax purposes. 
  • Distributions during the grantor’s lifetime from a grantor trust to a trust beneficiary, other than the grantor or the grantor's spouse, would be treated as taxable gifts to the beneficiary by the grantor.
  • Sales and exchanges with a grantor trust by a grantor would no longer be disregarded for income tax purposes.

Existing grantor trusts would not be affected to the extent that no additional contributions are made to the trust after the enactment of the proposed legislation. 

Planning Before Year-End: It is important to set up and fund grantor trusts prior to the enactment of the legislation in order to utilize the current benefits of the grantor trust status.  In addition, existing grantor trusts, specifically insurance trusts, should be pre-funded to avoid having later contributions included in the grantor’s estate for estate tax purposes. 

Valuation Discounts

Currently, if an individual makes a gift of a minority or non-controlling interest in a non-operating business, the value of the gift is calculated at less than the value of the proportional amount of the entity being transferred due to discounts for lack of marketability and lack of control. The new tax proposals would eliminate these discounts for transfers on or after the date of enactment if the entity’s assets include publicly-traded securities, non-operating cash or other passive, non-business assets.

Planning Before Year-End: Clients should make gifts utilizing valuation discounts of interests in entities holding non-business assets before the enactment of the proposed legislation in order to take advantage of these discounts for lack of marketability and lack of control.

Please consult with a Herrick Private Clients attorney regarding any questions or concerns that you have regarding the recently proposed tax law changes and how they could affect your estate planning goals. 

R. Andrew Shore at +1 212 592 1569 or [email protected]

© 2021 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.