President Joe Biden’s proposed “Build Back Better Act” (the Act) is quickly moving through both houses of Congress and may become law soon.
Traditionally, changes to the Tax Code have an effective date after the first of the new year or even later; however, this time, certain provisions go into effect on the date of enactment.
In the proposed Act, there are three significant changes to the federal estate and gift tax:
- Reduction of the federal estate, gift, and generation-skipping transfer tax exemption from $11.7 million to $5 million, adjusted for inflation,
- Several new taxable events for grantor trusts; and
- Elimination of valuation discounts for transfers of interests in entities owning nonbusiness assets.
Federal Estate, Gift, and Generation-Skipping Transfer Tax – After December 31, 2021
This exemption, currently $11.7 million per donor and $23.4 million per married couple, would be reduced to $5 million per person or $10 million per married couple. The exemption amount is reduced for those persons dying or making gifts on or after January 1, 2022. As a result, there are still opportunities to utilize the $11.7 million exemption amount prior to year-end.
Grantor Trusts – On or After the Date of Enactment
Grantor trusts are a longtime tool to exclude assets from the grantor’s estate. For grantor trusts established after the effective date of the Act the assets of any such trusts to be included in the grantor’s estate for federal estate tax purposes. In addition, if assets are contributed to a grantor trust after the effective date of the Act – even if the trust was established prior to the Act, a portion of the assets in the trust would be included in the grantor’s taxable estate. This would include many irrevocable life insurance trusts that were established to exclude life insurance proceeds from the grantor’s taxable estate. Fortunately, the assets of many grantor trusts established and funded before the enactment of the new law would be excluded from the grantor’s estate.
Interests in Entities Owning Nonbusiness Assets – After the Date of Enactment
Yet another reprimand on tax planning the Act would completely eliminate valuation discounts for transfers of interests in entities owning nonbusiness assets.
Estate Tax Valuation Reduction for Certain Real Property Used in Farming or Other Trades/Businesses – After December 31, 2021
A potential safe haven for some, those estates for deaths occurring in the new year will be able to take advantage of an increased limitation on the valuation reduction for certain real property associated with farming or trade. The new limit will be $11.7 million, a massive increase over the $750,000 (prior to inflation adjustment) allowed beforehand.
As a result of these proposed changes, there is now a narrow window to utilize estate planning techniques that could save millions of dollars in future estate tax. If you have questions regarding opportunities that may exist prior to changes in the law, please call Allison Comstock, Shannon Frank, Steve Lavallo or Mark Samila.