10/1/2021 – SMC Tax Update – Proposed Tax Changes


On September 13, 2021, the House Ways and Means Committee inserted an amendment into the House’s Omnibus Reconciliation Bill, which included a number of proposed tax changes.  The Senate will introduce its own version of the bill, which may include some of the same proposed changes and may include additional proposed changes.  Currently, it is all uncertain.  However, if enacted, the proposed changes are going to increase taxes for “wealthier” taxpayers.  While we wait on final legislation, the following proposals are included in the House bill that specifically impact estate planning and trusts:

  1. Changes to Grantor Trusts: The proposal would significantly limit the future use of grantor trusts. The proposed changes would impact grantor retained annuity trusts (GRATs), spousal lifetime access trusts (SLATs), individual life insurance trusts (ILITs), intentionally defective grantor trusts (IDGTs), beneficiary deemed owner trusts (BDOTs) and beneficiary defective inheritance trusts (BDITs).  Distributions from a grantor trusts to a beneficiary after the effective date of the law would be treated as gifts, and sales between the grantor and the grantor trust would be treated as a sale to third party, resulting in a recognition event and payment of income tax.
  2. Changes to the Gift and Estate Tax Credit and Valuation of Assets: The proposal would decrease the current exemption (currently $11,700,000) by half. After enactment the  gift and estate tax credit would be $5,000,000 a person indexed for inflation (Estimated $5,850,000). Under an additional proposal, taxpayers would no longer be permitted to utilize valuation “discounts” (lack of marketability and lack of control) for gift and estate tax purposes when transferring entities holding non-business assets (passive assets not used in the active conduct of a trade or business).
  3. Surcharge on individual, trusts and estates: The proposal would impose a tax equal to 3% of a taxpayer’s modified adjusted gross income over $5,000,000 ($2,000,000 for a married individual filing separately) or greater than $100,000 for estates and trusts, excluding charitable trusts.

Planning considerations:

  1. Consider making gifts now to lock in the use of the $11,700,000 credit and the use of valuation discounts. The effective date of any law change is (also) unclear.
  2. Review all irrevocable grantor trusts and contact your estate planning attorney or CPA to discuss options.
  3. Review all ILITs and contact your estate planning attorney or CPA to discuss additional gifts to the ILITs