What do the inheritance, gift and generational transfer tax proposals mean for high net worth individuals? – Tax


In mid-September 2021, the House Ways and Means Committee introduced legislation that could affect the estate plans of high net worth individuals and families. Led by Congressman Richard Neal of Massachusetts, the proposals would raise taxes for high-income families and corporations by about $ 2.1 trillion over ten years. $ 1.2 trillion of that income would go to lower taxes primarily for low- and middle-income families. The remaining revenues would go towards new national spending, such as education and family programs. Below is a brief summary of some key provisions of the proposed laws and suggested estate planning actions you can take right now:

Transfer tax exemptions can be reduced

Current law: Under current US tax law, each US taxpayer has a “unified credit” which allows the taxpayer to transfer property exempt from federal gift or estate tax up to a specified “exempt amount”. . The amount of the exemption for 2021 is $ 11,700,000, reduced by the value of any donation made during the taxpayer’s lifetime that was previously subject to federal gift tax and the value of any transfers other than the taxpayer. made upon death and which is subject to federal inheritance tax. Federal tax law also imposes a Generation Skip Transfer (“GST”) tax on, among other things, transfers of property by a transferor to “skip people” (for example, a grandchild or descendant). further away from the assignor). In 2021, the amount of the GST exemption per person is $ 11,700,000, reduced by any lifetime GST exemption grants. Under current law, these amounts are expected to increase each year until January 1, 2026, when exemptions are expected to drop to $ 5 million indexed to inflation from 2011.

Proposal: Under the new proposals, federal inheritance, gift and GST exemptions for each individual would be reduced effective January 1, 2022 to $ 6.02 million, but would continue to be indexed to inflation thereafter.

Involvement: Individuals who have more than $ 6.02 million in estate, gift and / or GST exemption in 2021 will lose this additional exemption amount on January 1, 2022 if these proposals become law.

Possible measures: People who still have estate, gift and / or GST exemptions should consider donating before the end of this year to use the excess exemption that will be forfeited if the proposal becomes law.

Grantor’s Trusts May Be Included in Grantor’s Estate

Current law: Transferor trusts are trusts the income of which is taxable to the transferor rather than to the trust itself. Under current legislation, the benefits of transferor trusts include allowing the transferor to pay tax on the trust’s income at a lower rate than would be applied if the trust paid its own income taxes. and withdrawing the assets from the transferor’s taxable estate to reduce inheritance taxes on the death of the settlor by making, for the most part, tax-free donations to the trust from the payment of its income taxes.

Proposal: Property held in irrevocable grantor trusts will be included in the taxable grantor estate. While prior contributions to existing irrevocable grantor trusts such as Grantor Retained Annuity Trusts (“Libres”) and Irrevocable Life Insurance Trusts (“ILITs”) would be excluded from the new law and therefore would not be not included in the taxable estate of the grantor, irrevocable grantor trusts created
after the promulgation of this law, as well as the contributions paid after the promulgation of this lawexisting irrevocable transferor trusts would be included in the transferor estate for federal estate tax purposes. In addition, any distribution of trust property to beneficiaries other than the settlor and / or his or her spouse would be considered a taxable gift.

Involvement: Any future contributions to existing irrevocable grantor trusts and any contributions to established irrevocable grantor trusts from this proposal becomes law would be included in the settlor’s estate and subject to federal inheritance tax. It should be noted, however, that some experts expect the insurance lobby to attempt to create an exception for ILITs, which would then continue to be grantor trusts whose assets are not included in the grantor’s estate.

Possible measures: Individuals who wish to create and / or contribute to Libres, ILITs or other forms of Irrevocable Transferor Trusts should consider doing so as soon as possible to ensure that such assets will remain out of the individual’s estate and, therefore, not subject to US estate tax. . It could be particularly tax-beneficial for people who already have ILITS to make substantial contributions to ILIT before the enactment of this law. Such contributions could cover outstanding premiums for policies held by ILIT so that these funds avoid the inclusion of inheritance tax. after the date on which this proposal becomes law. In addition, any grantor trust receiving contributions should include provisions to quickly eliminate its grantor trust status in the event that this law comes into effect prior to the funding of such a trust. Note, however, that if grantor trust status is removed for a particular irrevocable trust, the assets of that trust may be considered a gift made by the grantor to the trust for federal gift tax purposes.

Some appraisal discounts may be waived

Current law: Current US tax laws allow certain discounts to be claimed on the valuation of the entity’s interests. These discounts are beneficial because they reduce the value of the interest transferred, which in turn reduces the US transfer tax imposed on the transfer of that interest.

Proposal: Under the proposed legislation, any “non-commercial asset” held by an entity in which an equity interest is transferred after the date of adoption of this proposal would be valued without any discount being applied. The proposals define non-business assets as passive assets held for the production or collection of income and not used in the conduct of an active trade or business. Certain non-business assets include, but are not limited to, cash or cash equivalents, stocks, bonds, annuities, commodities, and real and personal property. The proposal also includes a transparency rule according to which if a parent entity holds 10% of the votes or 10% of the value of a subsidiary entity, the assets of the subsidiary entity will be treated as belonging directly to the parent entity.

Involvement: If this proposal becomes law, individuals will no longer be able to claim discounts for gifts from certain entity interests. In addition, such discounts would not be available for interest held in an individual’s estate upon death, which could result in an increase in estate taxes on the individual’s estate.

Possible measures: Any transfer of interests in entities that hold non-business assets that you are otherwise considering should be made before this proposal becomes law, because these provisions are intended to enter into force on the date of promulgation of the law.

It is important to note that the Ways and Means Committee’s proposal could be further amended by Congress before the law is enacted, and it is possible that no law will be enacted. Every taxpayer’s situation is different and you should consult us (or another advisor) about your particular plans.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.


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