A copy of this Client Alert can be found here.

The United States House Committee on Ways and Means recently issued proposed legislation, which if passed by Congress in its current form could have far-reaching implications for commonly used and long-standing estate planning strategies.

Some proposed changes, such as the reduction in the Federal estate and gift tax exemption amount, are scheduled to take effect on January 1, 2022. However, significant changes to trusts and the valuation of gifts are proposed to take effect as of the “date of enactment”, the date on which the new law would be signed by the President.

Among the provisions included in the proposed legislation are the following:

The current combined gift and estate exemption, as well as the generation-skipping tax exemption ($10,000,000 adjusted for inflation, which in 2021 is $11,700,000) is proposed to be reduced to $5,000,000 adjusted for inflation (projected to be approximately $6,000,000 in 2022). This reduction would become effective as of January 1, 2022. Clients who are considering making any large gifts to take advantage of the current higher exemptions should make gifts in the next few months.

The proposed legislation would change, as of the date of enactment, the rules governing certain types of “grantor trusts”, which are trusts that include terms that allow the grantor to pay income tax attributable to trust assets, rather than the trust itself paying the income tax. Under current law, the payment of income tax by the grantor is not considered a gift to the trust and allows the trust assets to grow free of income tax for the benefit of the beneficiaries.

The types of trusts that would be affected are trusts that are established to be excluded from the grantor’s estate for estate tax purposes yet allow the grantor to continue to pay income tax on any income earned by the trust during the grantor’s lifetime.

Contributions made to grantor trusts after the date of enactment of the proposed legislation would cause all or a portion of the trust assets to be included in the Grantor’s estate for estate tax purposes. Accordingly, clients may want to consider making contributions immediately to these types of trusts to fund them or fund them more fully before the enactment date.

Most commonly created lifetime trusts can or must be grantor trusts, including trusts for children or grandchildren, such as dynasty trusts, life insurance trusts (ILITs), and spousal lifetime access trusts (SLATs). Grantor retained annuity trusts (GRATs), charitable lead annuity trusts (CLATs) and qualified personal residence trusts (QPRTs) would also be impacted. Some trusts for children or grandchildren, including dynasty trusts, can be drafted as non-grantor trusts. However, other trusts, such as ILITs, SLATs, GRATs, CLATs, and QPRTs, are by definition grantor trusts. Therefore, under the proposed legislation many estate planning techniques that allow for transfer of significant wealth with little or no transfer tax would be eliminated.

Note that revocable living trusts are not impacted by this proposed legislation.

Given the significance of the proposed changes and the possibility of quick enactment, clients may want to consider changes to estate plans that can be effectuated quickly. For example, clients may want to consider making contributions immediately to grantor trusts to fund them or fund them more fully before the enactment date. In addition, with respect to insurance trusts, clients may want to consider “frontloading” the trust with funds to cover the payment of future premiums.

Under the proposed legislation, after the date of enactment valuation discounts would no longer be allowed for gift tax purposes for transfers of interests in entities which hold non-business assets, other than interests in active operating businesses. Again, clients who are considering transferring interests in an entity such as an LLC or partnership to family members may want to make the transfers before the date of enactment.

Under the proposed legislation, individuals at a certain income level with very large IRAs and other types of retirement accounts (with a combined balance in excess of $10,000,000) will be precluded from making additional contributions to such accounts; additionally, if the combined values of the retirement plans are greater than $10,000,000, 50% of the excess would have to be distributed out to the individual (and subject to tax). In addition, IRAs will no longer be able invest in a business of which the IRA beneficiary has specified ownership or control powers. Certain Roth conversions may also be eliminated. This portion of the proposed legislation would take effect as of January 1, 2022.

Please be advised that this is a fluid situation since there is no way to predict which, if any, of above provisions may take effect, or when legislation might be enacted.

However, given the potential for significant changes in the near future, clients should consult with their FisherBroyles advisors to see what, if any, impact the proposed changes will have and what actions might be taken. We recommend doing so as soon as possible in order to have time to consider possible steps to be taken and to implement them if desired, as it is expected to be an extremely busy year end.

For additional information, please contact any of the following:

Betsy McCall at betsy.mccall@fisherbroyles.com,

Sharon Soloff at sharon.soloff@fisherbroyles.com,

Gal N. Kaufman at gal.kaufman@fisherbroyles.com,

Lincoln Briggs at lincoln.briggs@fisherbroyles.com,

Lisa Schubel at lisa.schubel@fisherbroyles.com with any questions or more specific situations.

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Client Alert- Major Changes to Estate Planning may be on the Horizon.

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