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Impact of Proposed Tax Bill on Estate Planning

On Monday, September 13, 2021, the "Responsibly Funding Our Priorities" Bill was introduced and proposes to raise taxes to help pay for the Biden Administration’s “Build Back Better Act.”

The Bill is not yet law.  It has not yet been passed or even directly debated in the House Ways and Means Committee—much less either house of Congress.

Nevertheless, the Bill proposes significant changes to the Internal Revenue Code including reducing limits on gifts, increasing tax rates on capital gains, and other significant impacts to individuals tax advantage around estate planning. While this is again not law, it sets a roadmap of anticipated changes. You are encouraged to reach out to your advisors to discuss how the Bill and its progeny may impact you so that you can start planning now.

Here is a link to the Committee’s 18-page Summary of the (881 page) Bill.

There are several provisions of the Bill that, if passed, could affect your estate plan. The most notable estate planning specific provisions, include, but are not limited to:

  1. The Bill proposes to reduce the $11.7 million lifetime exemption ($23.4 million per married couple) back to its 2010 value of $5 million ($10 million per married couple) indexed for inflation. It is expected that should the Bill pass, that the lifetime exemption would be approximately $6 million. The Bill’s effective date for this provision is applicable to transfers occurring after December 31, 2021.
  2. The Bill proposes to increase the top capital gains rate from 20% to 25%. The proposed effective date for this change is September 13, 2021.  If there is a binding contract to sell a capital asset entered into prior to September 12, 2021, the current rates apply (even if escrow closes on or after September 13, 2021).
  3. The Bill proposes to curtail the use of grantor trusts as a vehicle to push assets outside of a taxpayer’s taxable estate for estate tax purposes while remaining responsible for the income taxes. The Bill makes such a grantor trust includable in the taxable estate of the grantor. The Bill also proposes to treat sales between a grantor trust and a grantor as a taxable event (which is not the case under current law). The Bill’s effective date for these provisions is the day on which the Bill becomes law.
  4. The Bill proposes to amend the valuation rules for certain transfers of nonbusiness assets by clarifying that when a taxpayer transfers nonbusiness assets, those assets would not be afforded a valuation discount for estate and gift tax purposes. The Bill’s effective date for these provisions is the day on which the Bill becomes law.
  5. The proposed Bill has a drastic effect upon the potential benefits of the Qualified Small Business Stock (QSBS) exemption.  This Bill eliminates the 100% and the 75% QSBS exemptions by limiting the QSBS exemption for trusts, estates, and individual taxpayers with adjusted gross income over $400,000 to the standard 50% QSBS exemption.  This change means that the maximum exemption on a $10 million QSBS capital gain on sale of a particular stock, would be $5 million per taxpayer per stock. The proposed effective date for this change is September 13, 2021.  Thus, any QSBS stock sales occurring on or after September 13, 2021, unless a binding contract to sell was already in place, will be subject to these new limitations.
  6. The Bill proposes to implement a surtax equal to 3% of a taxpayer’s adjusted gross income in excess of $5 million.

This summary is for informational purposes only and should not be relied upon as legal or tax advice.

To the extent that you would like to discuss the Bill or its impact on your estate plan, you are encouraged to reach out as soon as possible so that there is ample time to devise and execute a course of action prior to a potential enactment of the Bill.