US House of Representatives Bill Would Dramatically Change Estate Planning Strategies | Akerman LLP

On September 10, 2021, the United States House Committee on Ways and Means released draft legislation that, if enacted, would reduce the inheritance tax exemption and significantly limit the effectiveness of certain estate planning strategies. The bill incorporates various proposals made by several members of Congress earlier this year and may serve as further evidence that taxes on the wealthy are likely to rise. We summarize the various proposed changes that may impact year-end estate planning.

I. Decrease in exemption amounts

Current law: As you may recall, under the Tax Cuts and Jobs Act of 2017, the basic tax exemption on estates, gifts, and generation-by-jump transfers (TPS) doubled from $ 5 million. per person, indexed to inflation, to $ 10 million per person, indexed to inflation, effective January 1, 2018 and ending December 31, 2025. In 2026, the amount of the exemption would decrease to 5 million dollars per person, indexed to inflation.

Proposed law: The House’s proposal accelerates the return of the exemption amount to $ 5,000,000 per person, indexed to inflation, effective January 1, 2022 (estimated at $ 6.02 million in 2022). Therefore, if it is not used by December 31, 2021, an individual could lose the profit of approximately $ 5.680 million. [1] (or $ 11.36 million per married couple) from the inheritance tax, gift and GST exemption. Therefore, consideration should be given to making donations in 2021 to use the “Excess Exemption Amount”.

II. Amendments applicable to transferor trusts

The proposals discussed in this article will apply to: (1) trusts created on or after the date of the enactment of the law, and (2) any part of a trust established before the date of the enactment of the law. law that is attributable to a contribution paid on or after that date.

A. Deemed Owner of Transferor Trust

Current law: A trust is considered a “transferor trust” for income tax purposes if the transferor has retained certain powers or rights under the trust agreement. If the trust is treated as a transferor trust for income tax purposes, the transferor is the “deemed owner” and is taxed on the income of the trust (that is to say, the grantor declares the income on his Form 1040). The payment by the settlor of income tax is not considered an additional donation from the settlor to the trust. Therefore, an irrevocable “gift trust” designed to be a “transferor trust” can grow, not reduced by the payment of income tax; and, therefore, additional wealth is transferred to the beneficiaries of the trust.

While the trust is not considered for income tax purposes, it does not count for federal estate tax purposes – which means that if the trust is properly drafted, the Trust assets are not included in the settlor’s taxable estate. This dichotomy allows the settlor’s trust to serve as a central component of important estate planning structures (that is to say, Spousal Life Access Trusts or SLATs; donation / sale transactions, annuity trusts retained by grantor or FREE; and Irrevocable Life Insurance Trusts or ILITs).

Proposed law: According to the House proposal, a settlor’s taxable estate will include any trust of which he is the “deemed owner”. A credit will be applied on the death of the settlor in respect of any gift tax exemption used during the initial transfer to the trust; however, any appreciation of the trust after the transfer will not escape estate tax as permitted by applicable law.

B. Distribution tax

Current law: Generally, a distribution to a beneficiary of an irrevocable settlor trust can be exempt from gift tax. For example, if the settlor made a full donation to the settlor’s trust for the benefit of the settlor’s descendants and applied all or part of the grantor’s gift tax exemption to the transfer, then any distribution of the settlor trust to a beneficiary thereof is not subject to gift tax.

Proposed law: According to the House proposal, any distribution (other than to the deemed owner or to the spouse of the deemed owner) of the transferor trust to one or more beneficiaries during the life of the deemed owner (other than to fulfill an obligation of deemed owner) should be treated as a gift transfer.

C. Sale to Grantor Trust

Current law: A sale between a settlor and his “settlor trust” is not counted for income tax purposes even if the sale is recognized for all other purposes. Consequently, the capital gain is not recognized on any sale transaction between the grantor and the grantor trust (that is to say, the grantor is the only taxpayer involved in the transaction). Real estate planners have capitalized on this aspect of the law to structure sales techniques involving transferor trusts. Generally, for inheritance tax purposes, the value of the asset sold is ‘frozen’ at the time of the transaction (that is to say, the settlor receives consideration for an asset at its fair market value at the time of sale), and the appreciation of the asset after the sale passes to the settlor’s trust tax-free, as summarized below. above. The combination of the “freeze” and the grantor’s payment of income tax (as noted above) on the assets of the grantor’s trust results in a significant transfer of wealth from the grantor to the grantor’s trust.

Proposed law: According to the Chamber’s proposal, a sale between the grantor and the “presumed owner” of the grantor is equivalent to a sale between the grantor and a third party. Therefore, the licensor must recognize the capital gain on the sale.

III. Changes to valuation discounts

Current law: Generally, valuation haircuts (that is to say, for lack of market value and control) are available when a minority stake in a restricted company is transferred by way of gift or sale. For example, a taxpayer may donate a non-voting interest in a limited liability company or a limited partnership to a trust created for his descendants at a present value. The ability to use discounts results in the leverage effect of the gift tax exemption so that a taxpayer can transfer additional wealth. For example, suppose a taxpayer wishes to donate a non-voting minority stake in a business worth $ 10 million. Under applicable law, discounts may apply as follows:

Current law

Gross value:

10 million dollars

Discount (lack of market value):

($ 2 million)

Discount (lack of control):

($ 1 million)

Net value for gift tax purposes:

$ 7 million

Therefore, by applying the rebates, the taxpayer is able to transfer $ 10 million of wealth using only $ 7 million of his gift tax exemption. The taxpayer is able to apply the “savings” of $ 3 million to other transfers.

Proposed law: Under the House proposal, the transfer of non-commercial assets would not benefit from a valuation discount for transfer tax purposes. Generally, passive assets held for the production of income and not used in the active conduct of a trade or business are considered non-trading assets. Common examples of passive assets include cash or cash equivalents; shares in a company or any other equity; profits or participation in the capital of an entity; proof of indebtedness; annuities; trademarks or copyrights that generate royalty income; basic products; collectibles or personal property.

If the proposal becomes law and the company in the example above was not actively engaged in a trade or business, the taxpayer cannot get the $ 3 million in savings and must instead make the donation. with an undiscounted value of $ 10 million. The new law would come into force once the law is enacted.

IV. High Income Individuals, Estates and Trusts Supplement

Current law: Irrevocable trusts that are not transferor trusts or simple trusts are taxed in compressed tax brackets on undistributed income. For example, in the 2021 tax brackets, a trust with income over $ 12,950 is taxed at the rate of 37%; whereas a single person is taxed at the 37 percent tax bracket if he or she has income of $ 523,601 or more.

Proposed law: Under the proposal, the top personal income tax rate is reduced from 37% to 39.6%. In addition, a complex non-grantor trust will achieve the highest tax rate if it has taxable income greater than $ 12,500. In addition, estates or trusts with income greater than $ 100,000 must pay an additional 3% tax on their “modified adjusted gross income” which is defined as adjusted gross income less any deductions (not taken into account in the determination of the adjusted gross income) authorized for the investment the interest. If enacted, the law would enter into force after December 31, 2021.


Congress may pass tax legislation that includes all of the above, a combination of the above, or none of the above. While we cannot predict with certainty what will happen to these proposals, we are implementing strategies to take advantage of current law. Most scheduling options may only be available if done before December 31, 2021. Therefore, doing nothing may hurt you.

[1] $ 11.7 million (current exemption amount) less $ 6.02 million (estimated amount of exemption)

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