Update – House Ways and Means Committee Tax Proposals: Reconciliation Bill to Target Trusts, Estates and the Rich | PC Winstead


Last month, the House Ways & Means Committee (the “Committee”) approved a bill (the “Legislation”) as part of Congress’ ongoing $ 3.5 trillion budget reconciliation process. The legislation includes important tax proposals that, if passed, will dramatically change the landscape of tax and estate planning for high-income and high-net-worth individuals.

On September 26, 2021, the House Budget Committee released House Report No. 117-130 (the “Report”). The purpose of this 501-page report is to explain the intent of the tax provisions contained in the 881-page legislation.

Below is an overview of tax proposals that are particularly relevant for estate planning purposes:

  1. Reduction of the tax exemption on gifts, inheritances and transfers by generation leap (“TPS”): The bill proposes to accelerate the reduction of the basic exclusion amount for gift, estate and GST taxes from $ 11.7 million to $ 5 million (subject to inflationary adjustments), which was to take place in 2026. These reductions would be effective for donations made, or people who died after December 31, 2021.
  2. Elimination of Grantor’s Trust Benefits: The bill also proposes to eliminate the estate planning benefits of transferor trusts, that is, trusts deemed to belong to the creator of the trust or to another person (each referred to as the “transferor”. ) for federal income tax purposes. The following rules would apply to trusts created from the date of enactment and to existing trusts to the extent that transfers are made to such trusts from the date of enactment.
    • Inclusion of property tax. Assets held by a grantor’s trust would be included in the grantor’s estate and subject to inheritance tax upon the grantor’s death.
    • Distributions as gifts. Distributions from a settlor’s trust during the settlor’s life would generally be treated as taxable gifts.
    • Taxation at the end of the transferor trust status. If the trust status of the transferor of the trust is terminated (i.e. the trust becomes a separate taxpayer from the deemed owner), the transferor would be deemed to have made a taxable donation of the assets of the trust.
    • Recognized gain on transfers to the grantor’s trust. Transfers between a grantor trust and its grantor would be subject to income tax regardless of when the grantor trust was created.

    Most tax advisers have previously inferred that the provisions of the Transferor Trusts Act would only apply to (i) transferor trusts created after the enactment date and (ii) donations made after the enactment date. to pre-enactment assignor trusts. However, the report specifies that the legislation would apply to all post-enactment transfers between a settlor and a settlor trust, including settlor trusts created before the date of enactment. Therefore, a sale or exchange of assets after the effective date of the legislation between a pre-enactment grantor trust and its grantor would constitute an income tax realization event. Likewise, a gratuitous annuity payment made in kind with assets valued to the settlor after the date of entry into force of the legislation would constitute an income tax realization event. With respect to these grantor trust provisions, the report includes footnote 933, which states: “A technical correction may be required to reflect this intention”.

  3. No discount for non-commercial assets: Under the proposed legislation, the ability to claim valuation rebates when a taxpayer transfers certain business interests that own “non-business assets” would be eliminated. These non-commercial assets, such as cash, stocks, bonds and real estate (with the exception of certain active real estate trades and businesses), would be measured as if the transferor were transferring these assets directly to the transferee at full fair value. Merchant. This proposal would apply to all transfers made after the date of enactment.
  4. Tax increases for high income taxpayers. The proposals include a number of tax hikes for high-income taxpayers, which would take effect on January 1, 2022.
    • The top marginal tax rate would drop from 37% to 39.6% for individuals, trusts and estates.
    • The maximum tax rate for long-term capital gains would be reduced from 20% to 25%.
    • Trusts and estates with income over $ 100,000 would be subject to a 3% surtax based on their modified adjusted gross income (“AGI”). This 3% surtax would also apply to individual taxpayers, single or married, whose amended AGI exceeds $ 5 million. For married people filing separately, the 3% surtax would apply to amended IGAs greater than $ 2.5 million.
  5. Limitations of the Exclusion of Eligible Small Business Actions: Currently, taxpayers can exclude a specific percentage of the capital gain from income when selling Qualified Small Business Shares (“QSBS”). The bill provides that taxpayers with an AGI of $ 400,000 or more and all trusts and estates would only be allowed to exclude 50% of the eligible gain. This provision would generally be in effect for sales made after September 13, 2021.

Several of the tax proposals described above would come into effect on the date of adoption. However, it is important to note that the above provisions are only legislative proposals. Pending legislation with all revisions must be approved by other House committees, the entire House of Representatives, and the Senate before it becomes law.

While it is impossible to predict with precision when or what version of the bill will become law, taxpayers should quickly seek advice from their lawyers and other trusted advisers on how to proceed in this uncertain environment.

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