Since I last wrote a general update to our estate planning clients in late 2020, there had been relatively little real information about what tax law changes Congress might seek to make this year. Most items reported in the press were speculation or were about proposals which stood little chance of passage on their own.
That changed last week, as the House Ways and Means Committee (the House's tax-writing committee) published its initial draft of tax increases designed to pay for the proposed $3.5 trillion spending package also under consideration.
Although still at the committee stage, this bill is the best indication so far of what tax changes might ultimately emerge. For a detailed summary of the bill, I recommend this Forbes article. Key income tax provisions include a top ordinary income tax rate increase to 39.6%, a top capital gains tax rate increase to 25%, changes which eliminate many of the benefits of S corporations over tax partnerships for the self-employed, and more stringent income limits on the 20% passthrough income deduction.
In addition to income tax changes, the bill also contains a number of very important changes to the estate and gift tax law. These include:
a halving of each taxpayer's lifetime exclusion from estate, gift, and generation-skipping transfer taxes from $11.7 million per person for 2021 to approximately $6 million per person (as annually adjusted for inflation) beginning on January 1, 2022
a new rule providing that all grantor trusts (that is, trusts on which the grantor pays the income tax) are includible in the grantor's gross estate, effective for all new grantor trusts or new contributions to grantor trusts, from the date of enactment
a new rule dramatically reducing the availability of valuation discounts for gift tax purposes, from the date of enactment
The changes regarding grantor trusts and valuation discounts are designed to eliminate many of the most popular and effective estate planning strategies of the past two decades. These are the very strategies which we would otherwise recommend to most of our clients affected by the decreasing exclusion amount.
Affected strategies include installment sales to intentionally defective grantor trusts (IDGTs), grantor-retained annuity trusts (GRATs), and qualified personal residence trusts (QPRTs), all of which would be made all but impossible. Irrevocable life insurance trusts (ILITs) and family limited partnerships (FLPs) would also present substantial new challenges.
Furthermore, because the changes regarding these planning strategies would take effect upon enactment of the bill, taxpayers facing potential estate tax increases and their advisors should not wait until year-end to consider new planning. Many strategies we might recommend would have to be put into place before the bill is enacted.
I hasten to add that these proposals must make it through the entire legislative process before they become law. There are certainly interest groups working to prevent their enactment or modify their terms. But, these proposals were the result of internal negotiation among House Democrats for a package which they expect they can pass, and are thus the best indicator to date of what the final law might contain.
We recommend that you confer with your financial advisors and accountants--and with us--if you have any questions or concerns about these proposals. We will stand ready to work with you to decide what, if any, additional planning may be right for you.
You may decide not to act despite these developments. Estate planning is about much more than tax planning--a fact we strive never to forget. As always, we aim to provide you with the information you need to make an informed decision about what is right for you and your family.
Please call us at (843) 202-4472 or email us at info@swwlc.com to contact us or schedule an appointment.
