As we enter the Fall, we are facing proposals from the House Ways and Means Committee to change some Federal tax laws that will affect many common estate planning tools. While these new proposals have not yet become law, it is important to know what changes are being proposed and what planning opportunities should be considered in response.

While the House proposals contain many law changes for income taxes, gift taxes, and estate taxes, this Ahead of the Curve addresses two of the most important proposals that will have a significant impact on estate planning, if they become law:

Effective January 1, 2022, the current Federal estate, gift and generation-skipping transfer (GST) tax exemption amount of $11.7 million per person will be cut roughly in half under the new proposal, to $5 million per person (adjusted for inflation). Adjusted for inflation, the new exemption amount is estimated to be approximately $6,020,000. Those who would like to take advantage of the current higher exemption amount should consider making gifts by December 31, 2021.

Unlike the January 1, 2022 proposed reduction of the estate, gift and GST exemption amount, the major proposed changes to the treatment of grantor trusts for income, estate and gift tax purposes will be effective as of the date the law is enacted, likely later this Fall, before December 31. These provisions would apply to trusts created on or after the date the law is enacted and to new contributions to existing trusts on or after that date.

Under these proposals, grantor trusts, such as most irrevocable life insurance trusts (ILITs), spousal lifetime access trusts (SLATs) and grantor retained annuity trusts (GRATs), which have been common estate planning tools to remove assets from one’s taxable estate while being disregarded for income tax purposes, will instead be included in the grantor’s estate, in whole or in part.

Distributions from a grantor trust created after the law is enacted to someone other than the grantor, the grantor’s spouse, or to discharge a debt of the grantor would be treated as a taxable gift: for example, distributions to children. If a trust created after the law is enacted ceases to be a grantor trust during the grantor’s life, that will also be treated as a gift by the grantor. Sales between the grantor and a grantor trust after the date of enactment will no longer be ignored for income tax purposes, and losses from such sales will be disallowed. 

For grantor trusts created before the proposals become law, grantors should refrain from making additional contributions to the trusts after the enactment of the law without further guidance. For most ILITs that have premiums due after the date of enactment, if the grantor trust provisions become law, a contribution to the trust to provide funds to pay the premium could cause all or a portion of the ILIT to be included in the grantor’s estate. Therefore, careful planning (including possible restructuring of trusts through decanting) will have to be considered before such gifts are made. 

While we do not know what the final tax law changes will be or when certain changes will take effect, we do know that if these proposed provisions become law, the estate planning landscape will change dramatically. As the end of the year approaches, in the face of these possible significant changes, now is the time to review your individual circumstances which may suggest actions to be taken before the proposals become law.

 

Selzer Gurvitch Rabin Wertheimer & Polott, P.C. is a Bethesda, MD law firm focusing its practice primarily on transactional business, real estate, tax, estate planning, and commercial and construction litigation. For more than 39 years, the firm has served clients throughout the Washington, D.C. metropolitan area. Our lawyers apply traditional values of honesty, integrity, and hard work on behalf of our clients. We ask the right questions, listen carefully to the answers, and collaborate to develop and execute strategies designed to cost-effectively achieve our clients’ legal, business, estate planning, and personal objectives. Our attorneys get to know and come to care deeply about the people, businesses, and organizations that put their faith in us. We take tremendous pride in having established many multi-generational client relationships, in which we have earned the same level of trust from those young adults whose parents and grandparents first retained us. Each client, whether new or long-standing, receives our total dedication and commitment to achieve the best possible outcome. At Selzer Gurvitch, we will always stand for resolve, relationships, and results.