A new Democrat tax plan released by the House Ways and Means Committee proposes changes that would increase taxes on the wealthy. Some of these proposals directly affect estate planning.

  1. Reduction of Estate, Gift, and GST Tax Exemptions as of January 1, 2022

Under current law the exemption for estate, gift, and generation skipping transfer (GST) tax of $11,700,000 reverts back to $5 million (which when indexed for inflation would be approximately $6,020,000 in 2022) for decedents dying and gifts made after December 31, 2025. The plan moves up the date of the reduction of the exemption to January 1, 2022.

2. Changes Affecting Grantor Trusts Created or Funded After the Date of Enactment

The plan includes the following proposals:

  • Inclusion of grantor trusts in the estate of the grantor at death.
  • Treatment of distributions from grantor trusts to beneficiaries during the grantor’s lifetime as gifts from the grantor.
  • Gift treatment if grantor trust status is terminated during the grantor’s lifetime.

These proposals applicable to grantor trusts, if enacted, could largely eliminate the utility of grantor retained annuity trusts (GRATs), spousal limited access trusts (SLATs), qualified real property trusts (QPRTs) and insurance trusts as tax efficient estate planning techniques to remove property and appreciation on such property from a grantor’s estate.

In addition, the plan includes a new code section that would make sales or exchanges of property between a grantor trust and its grantor taxable transfers. This proposal would eliminate the ability to remove the appreciation on assets from a grantor’s estate through income tax-free sales by a grantor to a grantor trust, commonly called an intentionally defective grantor trust (IDGT).

3. Changes to Valuation Rules

The plan includes a change to the rules applicable to valuation of entity interests owned at death or transferred by gift. The changes would eliminate valuation discounts on nonbusiness assets held in entities. Nonbusiness assets include cash, stock, debt, annuities, and real property (other than certain real property used in a real property trade or business, which includes development, management, leasing, construction, or management businesses). This would eliminate most valuation discounts for entities, other than assets used in an active business.

4. Surcharge on High Income Individuals, Estates, and Trusts for Tax Years Beginning After December 31, 2021

The plan includes a surcharge tax of 3% of modified adjusted gross income in excess of $5,000,000 applied to most individuals, and in excess of $100,000 for estates and trusts. This additional tax could impact decisions to accumulate income inside GST exempt dynasty trusts.

5. Extension of Holding Period for Carried Interest to 5 years

The plan would extend the required holding period for many partnership interests to receive preferential long-term capital gain treatment to 5 years.

What was not included in this plan?

Interestingly, prior proposals to eliminate the step-up in basis of assets included in a decedent's taxable estate on death and forced recognition of capital gains on death are both missing from the Ways and Means Committee’s plan. Also, the plan would retain the current estate, gift, and GST tax rate of 40%.

We expect that final legislation may look substantially different from the current Ways and Means Committee plan. We will continue to monitor ongoing developments and will keep you apprised of legislation enacted.