President Joseph Biden and the Democratic majority in Congress are working on a $ 3.5 trillion tax and spending program that could dramatically raise taxes for the rich. In addition, new proposals are launched almost every month, which could significantly change the way families transfer their wealth.
It’s unclear when or if the $ 3.5 trillion package will be enacted, but at the time of writing, a bill is expected to be introduced in Congress next week. The effective dates of the different proposals also vary, with some coming into effect on December 31. , 2021, and some earlier, depending on when new laws are enacted.
From the For the 99.5% law to the STEP law, including the latest offer from the House Ways and Means Committee, it is important to know what changes could occur in order to take advantage of tax planning opportunities before it is too late. Here is an overview of the current law, some of the proposals under discussion and how these changes could impact planning opportunities if they become law..
Under current law, each individual can exempt $ 11.7 million ($ 23.4 million for two spouses) before a gift or inheritance tax is imposed. Thus, many people can pass on all or a significant majority of assets to heirs without tax consequences on donations or estates, if the value of their estate assets does not exceed the exemptions indicated.
The heirs also benefit from two tax rules currently in force. First, estates pass from estates of deceased persons to their heirs tax-free. Second, the value of the inherited asset is increased by the cost base over the value of the asset on the date of the deceased’s death. That is, when the heir later sells the inherited asset, regardless of the initial base price in the hands of the deceased owner, the heir recognizes the capital gain only on any increase in value. between the date of death and the date of sale – the tax on any pre-death gain is effectively wiped out. For example, shares that an individual bought for $ 1 million that are worth $ 5 million on the owner’s death will pass tax-free to the owner’s heirs, and when the heirs later sell those assets, the first $ 5 million of the sale proceeds will result in no income. tax.
At least three separate proposals are being considered and could have a significant impact on the way high net worth individuals transfer their wealth. In one proposal, the gift tax exemption will be limited to $ 1 million and the inheritance tax exemption will be reduced to $ 3.5 million. Other proposals, including the House Ways and Means Committee proposal, would effectively limit gift and inheritance tax exemptions to around $ 6 million, thereby accelerating a reduction previously slated for Jan. 1, 2026.
On the income tax side, some previous proposals would reduce or reduce the ability to increase the asset base until the date of death. And in some cases, they would also require recognition of the taxable gain on death. Although these proposals were omitted in the last House Ways and Means Committee report, this report and previous bills would increase the rates of capital gains and ordinary income of a segment of the well-to-do population.
The proposed exemptions may affect individuals with assets of $ 3.5 million in some cases and $ 6 million in others. Below are some of the planning opportunities currently available, but which may be eliminated before the end of the year:
- Discount planning. Minority and non-voting interests in corporations, LLCs, or partnerships, including entities funded by non-business assets, are often eligible for valuation discounts, typically between 20 and 40 percent, depending on the type of asset and the structure of the entity. This means that the value of an interest in these entities for gift and inheritance tax purposes may be less than full market value. Under the recent House Ways and Means Committee proposal, valuation rebates for interests in entities funded by non-commercial assets will no longer be available.
- Amendments to the Grantor’s Trust. Grantor trusts allow individuals to pass wealth on to younger generations, often without inheritance, generational transfer tax, or tax consequences. Under the rules of the grantor trust, the trust does not pay any tax on its assets, including capital gains, interest and dividends, and income from business assets. Instead, the individual settlor pays income tax on the assets held by the trust, making it a tax-free gift to the beneficiaries of the trust. In addition, sales of assets by the settlor to the trust are ignored for income tax purposes.
All of the above presented significant opportunities for tax savings and the transmission of wealth to younger generations.
The proposed changes to the Grantor’s Trust Rules would eliminate many, if not all, of the above benefits. The result: The assets of the trust are taxable in the estate of the deceased settlor and taxable donations are made on lifetime distributions to the beneficiaries of the trust. These proposed changes could come into effect as soon as the new laws are enacted or by the end of the year.
- Life insurance trust. Life insurance planning is often an important part of individual wealth. Estate tax consequences have traditionally been avoided by having an Irrevocable Life Insurance Trust (âILITâ) named as the owner and beneficiary of the insurance policy. But because an ILIT is often interpreted as a transferor trust, the current benefit of an ILIT could be eliminated, so that life insurance proceeds could be taxable in a transferor’s estate. Under the current House Ways and Means Committee proposal, the new rules can only apply to new grantor trusts and contributions to grantor trusts existing after the effective date of the act, but this is not clear at this time.
- Spousal Life Access Trusts (SLAT), Grantor Retained Annuity Trusts (FREE) and Qualified Personal Residence Trusts (QPRT). All of these trusts currently allow the elderly family member to retain direct or indirect control and enjoyment of the assets for a specified period of time and to avoid or reduce the gift and inheritance taxes associated with the transfer of the assets from the trust. to the next generation. But they are all Grantor Trusts and the current tax advantages associated with them could therefore be reduced or eliminated.
The final form of a tax invoice cannot be predicted with any degree of certainty, but Fox Rothschild’s team of tax advisors keep abreast of proposed changes, modifications and effective dates. People concerned about the impact these proposals could have on their estate planning should consult a lawyer immediately.