United States: “Building a Better Plan”: Major Tax Reform on the Horizon – Is Proactive Estate Planning Right for You?

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On October 28, 2021, the House Ways and Means Committee released a revised proposal as part of President Biden’s “Build Back Better Agenda”. The proposed legislation (the “Revised Proposal”) has been the subject of intensive negotiations since September 13, 2021, when the original proposal (“Initial Proposal”) was put forward, and will likely entail further significant changes before it becomes law.

While the original proposal highlighted massive tax reform that would impact estate planning for millions of Americans, the revised proposal excludes these changes. Nonetheless, given that changes could still be made as Congressional Democrats fight over final legislation, Cullen & Dykman believes it is imperative that our clients be aware of the originally proposed changes and the impact. of these changes to the federal exemption from inheritance and gift tax and grantor trusts.

Basic inheritance tax exclusion amount

The current 2021 gift and inheritance tax exclusion is $ 11,700,000. The original proposal would have ended the temporary increase in the basic exclusion amount, reducing that amount to $ 5,000,000, indexed for inflation. Under the original proposal, the basic exclusion amount effective January 1, 2022 would be $ 6,030,000 and would likely apply to estates of deceased deceased persons and donations made after December 31, 2021. Again, this part of the original proposal was excluded from the revised proposal. Proposal, but must be considered anyway.

Grantor’s Trusts

Currently, when a deemed owner of a transferor trust dies, the assets of that transferor trust are generally not included in the estate of the deemed owner for federal estate tax purposes, which means that the trust is not subject to federal inheritance tax on the death of the transferor. The original proposal would have changed the use of settlor trusts in three main ways: (1) by requiring that the assets of a settlor trust be included in the gross estate of the deemed deceased owner, with a credit adjustment to account for the use of the gift tax exemption when the donation to the trust has been made; (2) treating all distributions (other than to deemed owner or spouse) during the deemed owner’s life and the end of the transferor’s trust status during the deemed owner’s life as completed gifts, triggering income tax. donations, subject to two of the exceptions; and (3) subject the sales of assets to the grantor trust by the deemed owner to federal income tax in the same manner as if the deemed owner were to sell assets to a third party. Currently, grantors can sell appreciated assets to the grantor’s trust without recognizing a taxable gain. Again, this part of the original proposal was not included in the revised proposal, but should not be overlooked as the legislation is not yet final.

Conclusion

Although the revised proposal put forward on October 28, 2021 excludes the aforementioned changes regarding inheritance and gift taxes and transferor trusts, the legislation is not yet final and revisions are likely to be made. Therefore, your estate plan should be reviewed to determine if proactive planning is right for you.

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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