The House Ways and Means Committee recently proposed a draft tax bill that, if passed, could create some serious impacts on current Estate Planning strategies, and much quicker than expected. Below is a brief summary of the proposed changes that you need to be aware of.

The Estate and Gift Tax Exemption

The amount an individual can transfer without incurring a federal gift, estate, or generation-skipping transfer tax would be reduced from $11,700,000 to $6,020,000, effective January 1, 2022. Married couples would be capped at double that, at $12,040,000. For anyone considering using their gift tax exemption to transfer more than $6.02 million, they have until December 31, 2021.

Grantor Trust Taxation

The current protections against a grantor trust being subject to federal estate tax would be fundamentally changed. The trust would be considered part of the grantor's taxable estate. While it would be granted a credit adjustment to account for the use of the gift tax exemption when a gift was made, the appreciation of the gift would be included in the grantor's estate and be subject to taxes. Also, gift tax would be triggered on any distribution to a trust beneficiary with the exception of a grantor's spouse or if the distribution discharges an obligation of the grantor, such as to a grantor's minor child. Furthermore, an asset sale to the grantor trust by the deemed owner would incur federal income tax the same as if they sold it to a third party. And selling appreciated assets to a grantor trust would be treated as a realization event with the grantor recognizing taxable gain. The bill also adds "grantor trust" and "deemed owner" to the category of "related parties," meaning that losses are disallowed in sales or exchanges between them. Most important to note is that the effective date of these changes would be the bill's enactment date and would apply to new grantor trusts created on or after that date, as well as any contribution to existing trusts on or after that date. For those with grantor retained annuity trusts ("GRATs"), qualified personal residence trusts ("QPRTs"), spousal lifetime access trusts ("SLATs"), or irrevocable life insurance trusts ("ILITs"), or who are considering getting one of them, time is of the essence to take advantage of their benefits before these become less worthwhile or even unavailable.

Income Tax Rates

The top marginal individual income tax rate would increase from 37% to 39.6%. This would affect estates and trusts because it would also broaden the group of taxpayers in the top bracket by applying it to estates and trusts with taxable income over $12,500. It would also apply a 3% surcharge tax to trusts and estates with income exceeding $100,000. The effective date of these changes would be January 1, 2022.

With these proposed changes taking effect quickly, consult with your Estate Planning Attorney as soon as possible to discuss what your next steps should be to protect your family, preserve your legacy, and pass on your assets by design, not by default. At Sundvick Legacy Center, we make it a point to keep up-to-date with the latest Estate Planning tax law changes; we want our clients to be able to make well-informed and intentional Estate Planning decisions. To schedule a consultation to discuss your current estate plan or to create one, click here. 

Want to read more details about this draft bill?
Click here: National Law Review, "Estate Tax Watch 2021: House Ways and Means Committee Proposal Lowers Estate Tax Exemption"