Current Status of Trust and Estate Planning: Rule Changes Remain Fluid in Washington

Authored by Mark Lobb

Negotiations continue in Washington over President Biden’s $3.5 trillion economic spending and tax package. At the time of drafting this article, the House Budget Committee is advancing a version of the economic package, setting up possible votes on the floor of the chamber later this week. Lawmakers voted 20-17 in a mostly party-line ballot to move the bill forward during the weekend meeting.

As part of the process, the Budget Committee must now assemble the 13 component parts of the bill assembled by policy committees and send the 2,465-page bill to the Rules Committee which is the last step before a floor vote.

Trust and Estate Law Changes

The bill includes substantial changes to the trust and estate laws to fund the spending portions of the bill. Many of the draconian proposals put forward by the Biden Administration have not made it into the current draft of the bill. However, if the bill is passed in substance close to the current draft, the estate tax planning landscape will be materially different in 2022.

Notably, taxpayers will not have until the end of 2021 before they are negatively impacted by new grantor trust rules set forth in the bill. The new grantor trust rules set forth in the bill apply to trusts created and contributions made after the date of enactment which could occur in the next few weeks. If you have an irrevocable grantor trust in existence before the bill is enacted, you may still be able to complete a sale to the trust.

Estate and Gift Tax Exclusion and Step-up in Basis

The proposed bill will result in a basic exclusion amount and generation skipping transfer (GST) exemption of approximately $6,000,000 per taxpayer or $12,000,000 per married couple. This reduction will be effective for gifts and estates of decedents dying after December 31, 2021. Currently, the exclusion amount and GST exemption is $11,700,000 per taxpayer or $23,400,000 per married couple.

There is no mention of eliminating or modifying portability under the proposal. There is also no mention of the elimination of the step-up in basis above a $1 million threshold which was previously proposed by President Biden.

Estate Tax Valuation Increase in Reduction for Real Property Used in Farming

Currently, in certain instances, a decedent’s estate may reduce the value of farmland by $750,000 when determining the value of the land for estate tax purposes. The proposed recommendations allow for an increase in the adjustment amount to $11,700,000. This proposal will be effective for the estates of decedents dying after December 31, 2021.

Changes to Grantor Trust Rules

The bill includes numerous proposed changes to the taxation of grantor trusts. For transfer tax purposes the bill includes the following:

  • Upon the death of a deemed owner of a grantor trust, the assets of the grantor trust will be included in the gross estate of the deemed owner,
  • If a distribution is made from a grantor trust, such distribution will be treated as a gift for gift tax purposes unless the distribution is to the deemed owner or the deemed owner’s spouse, or discharges an obligation of the deemed owner, and,
  • If the grantor trust status is terminated during the deemed owner’s lifetime, the deemed owner will be treated as having made a gift of the assets of the grantor trust. If assets of a grantor trust are included in the deemed owner’s estate or treated as a gift from the deemed owner, an adjustment will be made to account for the amounts transferred to the trust by the deemed owner that were previously treated as taxable gifts. The effect of this proposal subjects the appreciation of any asset transferred to the grantor trust to estate or gift tax, as applicable. This proposal applies only to grantor trusts where the grantor is treated as the deemed owner, not to grantor trusts where the beneficiary is treated as the deemed owner.
  • Where there is a transfer of property between the deemed owner of an irrevocable grantor trust and the irrevocable grantor trust, the grantor trust rules are ignored in determining whether the transfer is a sale or exchange for income tax purposes.
  • A deemed owner of an irrevocable grantor trust and the irrevocable grantor trust will be considered related parties which would disallow any loss resulting from a sale or exchange between the deemed owner and the grantor trust. This proposal applies even where the beneficiary is treated as the deemed owner.

The proposals relating to irrevocable grantor trusts apply to:

  • Any trust created on or after the date of enactment of the new tax law by the House and the Senate,
  • To any portion of a trust established before the date of enactment which is attributable to a contribution to such trust on or after the date of enactment.

Valuation Rules for Certain Transfers of Nonbusiness Assets

Under the proposed rules, the methodology for valuing ownership interests in privately held entities for transfer tax purposes will be modified. The modifications eliminate the ability to transfer passive assets to an entity and obtain valuation discounts with respect to ownership interests in such entity. This proposal shall apply to transfers after the date of enactment. The changes are as follows:

  • Non-business assets owned by the entity will be disregarded in valuing the ownership interest in the entity,
  • Non-business assets will be valued separately as if the transferor had transferred such assets directly to the transferee, and
  • No valuation discount will apply when valuing the non-business assets.

Nonbusiness assets are any passive asset held for the production or collection of income and is not used in the active conduct of a trade or business. There are exceptions for certain real property used in the active conduct of a real property trade or business in which the transferor materially participates, and passive assets held as a part of the reasonably required working capital of a trade or business.

The rule changes discussed above may or may not be enacted and additional rule changes may be added to the draft bill in the coming days. For anyone seeking to maximize the favorable estate tax as they currently exist, action must be taking immediately.

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Authored by Mark Lobb

Negotiations continue in Washington over President Biden’s $3.5 trillion economic spending and tax package. At the time of drafting this article, the House Budget Committee is advancing a version of the economic package, setting up possible votes on the floor of the chamber later this week. Lawmakers voted 20-17 in a mostly party-line ballot to move the bill forward during the weekend meeting.

As part of the process, the Budget Committee must now assemble the 13 component parts of the bill assembled by policy committees and send the 2,465-page bill to the Rules Committee which is the last step before a floor vote.

Trust and Estate Law Changes

The bill includes substantial changes to the trust and estate laws to fund the spending portions of the bill. Many of the draconian proposals put forward by the Biden Administration have not made it into the current draft of the bill. However, if the bill is passed in substance close to the current draft, the estate tax planning landscape will be materially different in 2022.

Notably, taxpayers will not have until the end of 2021 before they are negatively impacted by new grantor trust rules set forth in the bill. The new grantor trust rules set forth in the bill apply to trusts created and contributions made after the date of enactment which could occur in the next few weeks. If you have an irrevocable grantor trust in existence before the bill is enacted, you may still be able to complete a sale to the trust.

Estate and Gift Tax Exclusion and Step-up in Basis

The proposed bill will result in a basic exclusion amount and generation skipping transfer (GST) exemption of approximately $6,000,000 per taxpayer or $12,000,000 per married couple. This reduction will be effective for gifts and estates of decedents dying after December 31, 2021. Currently, the exclusion amount and GST exemption is $11,700,000 per taxpayer or $23,400,000 per married couple.

There is no mention of eliminating or modifying portability under the proposal. There is also no mention of the elimination of the step-up in basis above a $1 million threshold which was previously proposed by President Biden.

Estate Tax Valuation Increase in Reduction for Real Property Used in Farming

Currently, in certain instances, a decedent’s estate may reduce the value of farmland by $750,000 when determining the value of the land for estate tax purposes. The proposed recommendations allow for an increase in the adjustment amount to $11,700,000. This proposal will be effective for the estates of decedents dying after December 31, 2021.

Changes to Grantor Trust Rules

The bill includes numerous proposed changes to the taxation of grantor trusts. For transfer tax purposes the bill includes the following:

  • Upon the death of a deemed owner of a grantor trust, the assets of the grantor trust will be included in the gross estate of the deemed owner,
  • If a distribution is made from a grantor trust, such distribution will be treated as a gift for gift tax purposes unless the distribution is to the deemed owner or the deemed owner’s spouse, or discharges an obligation of the deemed owner, and,
  • If the grantor trust status is terminated during the deemed owner’s lifetime, the deemed owner will be treated as having made a gift of the assets of the grantor trust. If assets of a grantor trust are included in the deemed owner’s estate or treated as a gift from the deemed owner, an adjustment will be made to account for the amounts transferred to the trust by the deemed owner that were previously treated as taxable gifts. The effect of this proposal subjects the appreciation of any asset transferred to the grantor trust to estate or gift tax, as applicable. This proposal applies only to grantor trusts where the grantor is treated as the deemed owner, not to grantor trusts where the beneficiary is treated as the deemed owner.
  • Where there is a transfer of property between the deemed owner of an irrevocable grantor trust and the irrevocable grantor trust, the grantor trust rules are ignored in determining whether the transfer is a sale or exchange for income tax purposes.
  • A deemed owner of an irrevocable grantor trust and the irrevocable grantor trust will be considered related parties which would disallow any loss resulting from a sale or exchange between the deemed owner and the grantor trust. This proposal applies even where the beneficiary is treated as the deemed owner.

The proposals relating to irrevocable grantor trusts apply to:

  • Any trust created on or after the date of enactment of the new tax law by the House and the Senate,
  • To any portion of a trust established before the date of enactment which is attributable to a contribution to such trust on or after the date of enactment.

Valuation Rules for Certain Transfers of Nonbusiness Assets

Under the proposed rules, the methodology for valuing ownership interests in privately held entities for transfer tax purposes will be modified. The modifications eliminate the ability to transfer passive assets to an entity and obtain valuation discounts with respect to ownership interests in such entity. This proposal shall apply to transfers after the date of enactment. The changes are as follows:

  • Non-business assets owned by the entity will be disregarded in valuing the ownership interest in the entity,
  • Non-business assets will be valued separately as if the transferor had transferred such assets directly to the transferee, and
  • No valuation discount will apply when valuing the non-business assets.

Nonbusiness assets are any passive asset held for the production or collection of income and is not used in the active conduct of a trade or business. There are exceptions for certain real property used in the active conduct of a real property trade or business in which the transferor materially participates, and passive assets held as a part of the reasonably required working capital of a trade or business.

The rule changes discussed above may or may not be enacted and additional rule changes may be added to the draft bill in the coming days. For anyone seeking to maximize the favorable estate tax as they currently exist, action must be taking immediately.