Last week, the U.S. House of Representatives Ways and Means Committee released a draft of its proposed tax reforms to be included as part of the budget reconciliation bill currently being negotiated by Congress.
Among the important provisions of the draft proposal are several that affect frequently used gift and estate tax planning strategies. Those include:
- A reduction in the federal gift and estate tax exemption from $11.7 million in 2021 to $6.02 million effective January 1, 2022. This incentivizes certain taxpayers to potentially make sizable gifts before 2021 year-end to benefit from the higher exemption.
- The inclusion of the assets of a “grantor trust” in the taxable estate of the deemed owner of such trust. An important takeaway for this item is that the proposed effective date for this change is the date of the bill’s enactment.
- Limiting a taxpayer's ability to claim certain valuation discounts for entities which own “passive assets.” This is a common tool for reducing the taxable estate for purposes of the federal gift and estate tax purposes. The proposed effective date for this change is the date of the bill’s enactment.
- Proposed changes to IRAs with a focus on self-directed IRAs that would increase the tax consequences of ownership of such IRAs with values in excess of $10 million. These changes generally would be effective as of January 1, 2022.
- The end to “back door” Roth IRAs effective January 1, 2022.
In addition to proposals targeting federal gift and estate tax laws, there are several proposals aimed at increasing income tax rates and adding a surcharge tax to higher income taxpayers.
The draft bill is obviously not the law at this point, and the Senate’s proposed tax reforms could differ substantially. However, the House proposal does demonstrate Congressional intent to decrease the federal gift and estate tax exemption and attempt to limit the effectiveness of popular estate planning and wealth transfer techniques, including grantor retained annuity trusts (“GRATs”), qualified personal residence trusts (“QPRTs”), spousal lifetime access trusts (“SLATs”) and irrevocable life insurance trusts (“ILITs”).
If these proposed changes will impact your estate plan, it would be prudent to discuss current planning options with your attorney and other tax advisors before the opportunity has passed.
Luis F. Ruiz