|As you may be aware, the House Ways and Means Committee has passed its budget reconciliation recommendations, which include a number of proposed tax changes. The Senate will introduce its own version of the bill, which will likely include some of the same proposed changes as well as additional ones. If the two bills are different, they must be reconciled and agreed upon before the final bill goes to the President for signature. While we do not know what the ultimate bill will include, we do want to make our clients aware of potential changes to the tax laws that may impact them.
Estate and Gift Tax Exemptions
Under current federal law, the lifetime estate and gift tax exemption amount is currently $11,700,000 per taxpayer. Under current law, this exemption will revert (“sunset”) to 2011’s original $5,000,000 base amount (adjusted for inflation) on January 1, 2026. Under the House’s bill, the exemption is proposed to revert to 2011’s $5,000,000 base amount (adjusted for inflation) on January 1, 2022 (this is estimated to be $6,020,000). The applicable federal estate tax rate is 40%.
If the proposed House bill is passed, estates of decedents dying after January 1, 2022, valued in excess of $6,020,000, will be subject to federal estate tax at the rate of 40%. This is in addition to the New York state estate tax which is imposed upon estates valued in excess of $5,930,000 (for 2021).
If you anticipate that the value of your estate at your death will be in excess of the above amounts, you may want to consider some estate tax planning at this time to lock in the benefit of the current higher exemption. Such planning may include making gifts to or for the benefit of your descendants to take advantage of the current $11,700,000 estate tax exemption amount before it is potentially reduced. Additionally, if you are the spouse of a decedent who died with unused federal estate tax exemption less than two years ago, it is advisable that you file a federal estate tax return for your deceased spouse and make a “portability” election so that your estate can utilize your spouse’s unused exemption at your death. Even if your spouse passed away longer than two years ago, if you believe you could benefit from his or her portability election (because your assets have grown significantly since his or her date of death), you should consider applying to the IRS for a Private Letter Ruling seeking permission to make a late portability election.
Other Estate and Gift Tax Changes
In addition to the proposed reduction in the lifetime estate and gift tax exemption amounts, the House bill also includes proposed changes to the treatment of grantor trusts whereby: (a) grantor trust assets would be includable in a grantor’s taxable estate; and (b) grantor trust status will be disregarded for the purposes of sales and transfers between a grantor and a grantor trust, causing the recognition of gain (or loss) on sale.
These changes would apply to grantor trusts created after the date of enactment, and to existing grantor trusts to which a contribution is made after the date of enactment. This raises concerns as to existing Irrevocable Life Insurance Trusts (ILITs) that own policies on the grantor’s life, which are generally structured as grantor trusts. Grantors who make annual gifts to fund premium payments may want to consider large current gifts to fund expected premiums for at least several years. At a minimum, you should consider funding ILITs now for premium payments due in the near future.
Valuation of Nonbusiness Assets
The House bill would curtail the use of valuation discounts for estate and gift tax purposes. Under current law, a taxpayer may take valuation discounts to the extent applicable. For example, if a decedent owned or a donor gifted a 30% interest in a family-owned limited liability company, the fair market value of the minority interest for estate and gift tax purposes may be reduced by discounts for lack of marketability and lack of control.
Under the new bill, discounts would still be allowed for the transfer of interests in operating businesses, but not for passive investments. Gifts of interests in entities holding primarily investment assets should be made before the effective date to apply valuation discounts.
Income Tax Changes
The bill also includes major income tax changes. These include increased income and capital gains tax rates for high income taxpayers. The bill also restricts Roth IRA conversions for high earners. Accordingly, you may wish to consider a Roth IRA conversion before the end of the year, before any income tax rate increases take effect.
We are available to speak with you and your family about the proposed House bill and its potential impact on your estate planning as well as various estate planning techniques that may benefit you. Please contact us to schedule an appointment if you would like to review your planning.
Contact Our Trusts and Estates Group
Greg Pond, Lisa Hunter, Donna Turetsky and Sandra Pendrick are Partners in the Trusts and Estates Practice Group at Certilman Balin. The team assists clients in every aspect of estate and tax planning, estate administration, probate law, litigation and elder law. Contact them at firstname.lastname@example.org; email@example.com; firstname.lastname@example.org and email@example.com. You may also call 516.296.7000 and ask for anyone of these attorneys.