By Jeffrey G. Moore, Attorney in the Estate Planning & Probate Practice Group
This last week, House Democrats released details of a new tax proposal to support the $3.5 trillion spending plan. Although we stress that these are indeed proposals at this point, we wanted you to be aware. The proposals will inevitably undergo further revisions before being passed by the House and taken up by the Senate. Below are a few key proposals related to estate planning:
Decrease in the Gift, Estate and GST Tax Exemptions
- Current law: The gift, estate, and GST (generation skipping transfer) tax exemptions are $11.7 million per person (adjusted for inflation).
- Proposed legislation: Effective January 1, 2022, these exemptions will decrease to $5 million per person adjusted for inflation from 2011. Therefore, the exemption would be approximately $6.2 million as of January 1, 2022.
- It should be noted that the inflation adjustment for the annual gift exclusion is scheduled to increase from $15,000 to $16,000 effective January 1, 2022 (per donor, per donee, per year).
- PLANNING SUGGESTION: For those considering gifting their remaining gift and estate exemption, it may be prudent to act prior to the end of this year. But recall that gifts lower than proposed exemption will not utilize any of the disappearing exemption amount. To utilize the disappearing exemption amount, the gift would need to be in excess of the proposed exemption amount.
Basis Adjustment
- The proposed legislation appears to retain the current law that upon one’s death a decedent’s assets would receive an adjusted basis to date-of-death values. This is a significant development because prior proposals not only eliminated the basis adjustment but also taxed the capital gains at an increased capital gain rate of roughly 43% at the time of death (i.e., not upon sale of the asset).
Valuation Reduction for Qualified Farming Real Property
- Current law: Qualifying farm property may be eligible for a special valuation reduction up to maximum of $750,000.
- Proposed legislation: The maximum valuation reduction is increased from $750,000 to $11.7 million. Although this is one of the few taxpayer-friendly provisions of this proposed legislation, be aware that any valuation reduction would also decrease the basis adjustment.
Estate Taxation of Grantor Trusts and Sale to Grantor Trust
- A grantor trust is a trust in which the creator transfers property to a trust but retains the obligation of paying the income tax on the trust; however, the payment of the income tax is not considered an additional gift. The proposed legislation provides that any grantor trust created after the effective date will be included in the grantor’s taxable estate. This is a significant policy change and would affect Grantor Retained Annuity Trusts (GRATs), Qualified Personal Residence Trusts (QPRTs), and Irrevocable Life Insurance Trusts (ILITs).
- Any sale of assets to a grantor trust will trigger immediate income tax.
Valuation of Non-Business Assets.
- Current law: Transfers of minority interests in a family entity (usually a limited liability company (LLC)) that holds passive assets (i.e., triple net leased real estate, marketable securities, or other assets not used in active conduct of business) may receive a valuation discount on the gift of such interests.
- Proposed legislation: No discount available for transfer of non-business assets.
- QUESTION: When is real estate merely “passive” as opposed to an “active” business? The ultimate definitions in this legislation will be key.
Income Tax Provisions
- Income tax: The proposed legislation would increase the highest marginal rate from 37% to 39.6% for joint filers over $450,000.
- Capital gains tax: The proposed legislation would increase the capital gains rate from 20% to 25%.
Again, we emphasize that the details above remain proposed legislation. Nonetheless, we wanted you to be aware. We will, of course, continue to monitor developments.
Jeffrey Moore is a partner in the Estate Planning & Probate practice group. The information in this article is not intended to provide legal advice. For professional consultation, please contact Jeff at jmoore@sglaw.com at Saalfeld Griggs PC. 503.399.1070. © 2021 Saalfeld Griggs PC
