Tax Law Proposals That Could Impact Estate Planning

  • Estate Planning
Tax Law Proposals That Could Impact Estate Planning

Congress remains in negotiations over the contents of the Build Back Better Act, the multi-trillion package for economic and infrastructure legislation that’s the cornerstone of President Joe Biden’s administration. The budget proposal features several proposed changes to the Internal Revenue Code. A few of them, if enacted, may impose sweeping alterations on estate planning, particularly in the area of gift taxes.

Certain parts of the Build Better Act may go into effect at once upon its passage, which means that estate planners may have to scramble to put their clients in a favorable end-of-year position. These are three of the proposals that could change estate planning the most:

Decreasing Estate and Gift Tax Exemptions

Under current law, an individual may exempt up to $10 million for estate and gift taxes with the maximum limit scheduled to revert to $5 million on January 1, 2026.

The proposed legislation would move that reversion date to January 1, 2022 — meaning the $5 million exemption limit would take effect in a matter of weeks.

If the proposed legislation goes through, individuals may want to consider using up any gift tax exemption they have left before the end of the 2021 calendar year.

Grantor Trust Rule Changes

The grantor trust is a popular estate planning instrument for controlling taxable events on transferred assets. Several parts of the proposed legislation, if enacted, will have a significant impact on the use and effectiveness of grantor trusts.

Possible law changes include:

  • Required valuation of all assets at the time of death in the grantor's estate
  • Imposing income tax on sales transactions between grantor and grantor trust
  • Taxing distributions from a grantor trust to outside beneficiaries
  • Treating termination of grantor trust as a gift of assets to beneficiaries

If these proposed changes go into effect, they’ll have a sweeping impact on several kinds of grantor trusts, including spousal lifetime access trusts (SLATs) and irrevocable life insurance trusts. They’ll also make grantor-related annuity, and qualified personal residence trusts effectively worthless as estate planning instruments.

Valuation Changes on Non-Business Estate Assets

Many estate planners use a method for reducing the value of nonbusiness assets — like cash, marketable securities, and personal real estate — after they’re distributed to members of the trust.

In this strategy, nonbusiness assets are transferred to a family limited partnership or liability company to be later gifted or sold to fractional or minority interests. This strategy enables the transfer at significantly lower rates than if they were transferred outside of the trust.

The proposed legislation would end these discounts on nonbusiness assets. While these assets may be assumed to include the types mentioned above, the exact definition under the new legislation is unsettled.

Pelorus: Your Estate Planning Partner

Pelorus Financial Group can help you and your clients understand the impact of these proposed changes. We’ve partnered with advisors for more than 19 years and can assist you in forming an estate planning strategy around any new legislation that takes effect. Contact Pelorus for assistance.

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