December 10, 2021
Estate planning moves this year have been complicated by tax changes that were included in the Build Back Better Act, reported by the Ways and Means Committee in September. The most significant of these is the rough halving of the amount exempt from federal estate and gift tax, from the current $10 million to $5 million (plus inflation adjustments—this year the exempt amount is $11.7 million). The move was already on the books, but scheduled for 2026; the legislation would advance that drop to the first of next year.
This has some estate planners suggesting to their clients that major gifts made this year could “lock in” the larger exempt amount. The fate of the legislation remains unclear, and historically a reduction in the amount exempt from federal estate taxes has never occurred, only been threatened. To completely lock in the larger exemption a taxpayer’s lifetime taxable transfers would have to exceed $11.7 million.
The legislation also takes aim at “intentionally defective grantor trusts” and “grantor retained annuity trusts” (GRATs), which have been used by the wealthy to minimize estate and gift taxes. For example, according to a report from ProPublica, Laurene Powell Jobs, the widow of Steve Jobs, used a series of GRATS after the death of her husband to transfer some $500 million to children, friends and family while avoiding an estimated $200 million in federal gift tax. The changes to trust taxation are not delayed to next year, but could take effect upon the enactment of the legislation. Some observers have suggested that they may have a retroactive effect.
Changes from some wish lists that did not appear in the Ways and Means release, include:
- taxing capital gains at death or upon a transfer to a trust;
- increasing the estate tax rate from the current 40% to 65%; and
- changes to the taxation of dynasty trusts.
See your estate planning advisors to learn more.