2021 Proposed Tax Reform
On September 13, 2021, the House Ways and Means Committee released a proposal for funding President Biden’s Build Back Better Act as part of the budget reconciliation Plan. The Ways and Means Committee’s plan includes tax changes affecting a multitude of areas. Below are some of the proposed changes that may impact your estate plan.
As anticipated prior to the change in administration, the Ways and Means Committee’s proposal reduces the temporary increase in unified credit against estate and gift taxes. Under the 2017 Tax Cuts and Jobs Act (“TCJA”), the unified credit was raised to $11.18 million per individual, indexed for inflation. Today, in 2021, the unified tax credit totals $11.7 million per individual, indexed for inflation. The increase in the unified credit was set to expire at the end of 2025, thus reverting back to pre-TCJA levels. Under the Ways and Means Committee’s proposal, the unified credit is set to revert to the 2010 level of $5 million per individual, indexed for inflation.
Additionally, the reduction in the unified credit would be backwards looking. This means that, for instance, if an individual to date has used $2 million of his or her $11.7 million credit, once the reduction is in place, that individual will be regarded as having used $2 million of his or her $5 million credit. This would leave that individual with only $3 million in useable credits over the span of his or her lifetime.
Of particular importance is the proposal’s impact on grantor trusts. The proposal adds a Section 2901 to the tax code, which makes grantor trusts includable in a decedent’s taxable estate when the decedent is the deemed owner of the trusts. Prior to this provision, taxpayers were able to use grantor trusts to take assets out of their estate while continuing to control the trust.
Further, the proposal adds a new Section 1062, which treats sales between grantor trusts and their deemed owner as equivalent to sales between the owner and a third party. Currently, sales between grantor trusts and their owner are treated as disregarded for income tax purposes. However, the addition of the new Section 1062 would treat a sale between a grantor trust and its owner as a recognition event, meaning there would be income tax consequences resulting from the sale. While these proposals would only apply to future grantor trusts and future transfers, Senator Bernie Sanders and Senator Chris Van Hollen have each proposed bills with similar language regarding grantor trusts and swaps. Whether these changes will have a retroactive effect remains to be seen.
Further, the Ways and Means Committee seeks to amend section 2031 so that when a taxpayer transfers nonbusiness assets, those assets should not be eligible for a valuation discount for transfer tax purposes. Again, this amendment would only apply to transfers made after the proposal is formally enacted.
Lastly, the Ways and Means Committee’s plan includes a proposal to increase the capital gains tax. Under the proposal, the capital gains tax rate would increase to 25%. This is particularly important when viewed in conjunction with Senator Chris Van Hollen’s bill. The Van Hollen bill contains a provision where assets held in a trust would be taxed every so many years (in this case, every 21 years). In these deemed sales, the trust assets would be subject to capital gains tax.
With all the uncertainty regarding these changes, it is best to get your estate plan in order sooner rather than later. For more information regarding this or any other estate planning or corporate business matter, please contact us at 404-255-7400 or email us at info@hoffmanestatelaw.com
