Tax laws

No change in Congress after all?

For almost a year, various proposals and so-called “frameworks” have been debated in Congress regarding changes to federal inheritance and gift laws. Almost all would have (i) reduced the amount that individuals could give during their lifetime or bequeath on death before the application of taxes on federal transfers, (ii) eliminated the so-called “hike” base that occurs on death and allows to those who inherit assets to avoid tax on capital gains accrued during the life of a deceased person, (iii) capital gains taxed on death or earlier without the need for a sale of ‘active, or (iv) a combination of the above. High net worth individuals and their advisors have struggled to beat the expected effective date of these rules, with many fearing a retroactive application to January 1, 2021, but more likely predicting an effective January 1, 2022 date. surprisingly, the wording of the latest House of Representatives proposal, released on Thursday, October 28, 2021, does not contain any of the above provisions. The Build Back Better law (HR 5376) does not contain any change in the amount of the exclusion of inheritance tax and donations or the base increase rules. While many may breathe a sigh of relief, two things are worth noting:

  1. The current $ 11.7 million[1] the exclusion of inheritance and gift tax was provided for under a temporary law. Even without any law of Congress, the exclusion will be halved effective January 1, 2026. Amounts in excess of the exclusion are taxed at a federal rate of 40%. The 2026 reduction in the amount of the exclusion is a holdover from the Tax Cut and Jobs Act of 2017, which temporarily doubled the amount of the exemption until December 31, 2025. The sunset provisions of the 2017 law remain in place. Previous congressional proposals in 2021 only served to speed up the date on which the removal (or extinction) of the exclusion would take place. So while the Build Back Better Act grants a temporary stay to those whose assets exceed the exclusion amount, it does nothing to make the broader exclusion permanent. Individuals would still be advised to consider the impact of the sunset of 2026 in their ongoing estate planning.

  2. It is not uncommon for Congress to reinsert previously drafted bills into bills in the final hours before legislation is put to an effective vote. Many are familiar with the changes brought about by the SECURE Act which eliminated the ability for most people inheriting individual retirement accounts (IRAs) to extend withdrawals from those accounts over their own lives and thus defer taxation.[2] The provisions of the SECURE Act appeared to be stuck in Congress for months before being added to an unrelated spending bill in late December 2019 and becoming law on December 20, 2019. While speculative, the same could happen. with modifications of inheritance and gift. amount of tax exclusion or other provisions affecting estate planning.

Also absent from the Build Back Better Act, several Byzantine provisions applied to “assignee trusts”. The complexity of “concessionaires” and the rules applicable to them are beyond the scope of this article.

While the Build Back Better law provides relief from previous proposals that would increase the amounts subject to inheritance and gift tax, the law does not present good news regarding the income tax rates applicable to inheritances and to trusts. The Act includes provisions that would subject estates and irrevocable trusts to new income tax surcharges that are also being proposed for individuals. In what has been called the “Millionaire Income Surtax,” the Build Back Better Act applies a 5% surtax on income over $ 10 million for individuals and an additional 3% surtax on individuals. revenues greater than $ 25 million.[3] However, surtaxes apply to estates and trusts at much lower levels. The thresholds for estate and trust income are well below the million dollar level, with the 5% surtax beginning to apply at the $ 200,000 income level and the additional 3% surtax at the $ 200,000 income level. $ 500,000.[4]

Those with trusts or estates beyond the exclusion of federal inheritance and gift tax, or who have previously funded irrevocable trusts to which the proposed surtaxes would apply, would do well to stay in touch with their advisers on these matters. Legislative proposals in these areas remain very fluid.


[1] This amount is indexed to inflation.

[2] Special rules exist for spouses, minor children and disabled beneficiaries.

[3] The amounts indicated are those which apply to single persons, as well as to married persons who deposit jointly. There is no separate threshold for married couples applying jointly. If a person is married but produced separately, each spouse will trigger the application of the surtax when they have reached a modified adjusted gross income of $ 5M for the 5% surtax and of $ 12.5M for the additional surtax of 3%.

[4] In all cases, the measure of income for the purposes of the surtax is “modified adjusted gross income”.

© 2021 Davis | Kuelthau, sc All rights reservedRevue nationale de droit, volume XI, number 302