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Proposed Law Changes Impacting Estate and Gift Tax Planning

Healthy Growth Blog

By Eric Flickinger, CPA, ABV
May 25, 2021

Between the Biden Administration’s American Families Plan and the proposed “For The 99.5 Percent Act,” several potential changes could have a significant impact on estate and gift tax planning opportunities. Many iterations and changes will likely occur before these changes are finalized. However, planning should be happening now based on the below changes being considered. All comparisons below are based on 2021 individual limits.

Unified Tax Credit
Over the past 20 years, the unified tax credit has trended higher. This will change if the new proposals become law. The most recent proposal would have the individual unified credit decline from $11.7 million to $3.5 million. Additionally, the gift exemption would be limited to $1.0 million. If passed, the proposal would take in effect on January 1, 2022.

Capital Gains & Estate Tax Rates
The American Families Plan proposes raising revenue through increasing the capital gains and dividend rate for those making over $1 million. The current capital gains rate is 20% for those making over $441,451 plus an additional 3.8% for individuals making more than $200,000 bringing the highest rate to 23.8%. Under the proposed plan, the highest rate would increase to 39.6% plus 3.8% for a total of 43.4% for those making over $1.0 million. This is a significant jump that may motivate business owners that have been considering exiting their business to do so before this potential change. There also may be portfolio optimization strategies for capital assets with sizable unrealized gains.

The highest estate tax rate is currently set at 40% for taxable amounts over $1.0 million. President Biden’s recent budget proposal aims to make the capital gains tax retroactive which could limit future planning opportunities.

Eliminate Stepping-Up the Basis of Unrealized Gains
Assets with unrealized gains can avoid being taxed if the appreciated assets are held to death. The heirs receive the assets at a stepped-up basis to the fair market value at the date of death and therefore no capital gains are realized. Under The American Families Plan, the step up in basis would be eliminated for gains in excess of $1.0 million. A few exceptions are expected for family-owned businesses and farms where the heirs continue to run the business after the transfer.

Valuation Discounts
Discounts for lack of control and lack of marketability are commonly applied to privately held businesses and holding companies. However, the For the 99.5 Percent Act proposes not allowing discounts for nonbusiness assets. Generally speaking, a nonbusiness assets for this proposed Act means any asset which is not used in the active conduct of the trade or business. The Act further restricts taking any discounts for gift or estate purposes for any interest in an entity that is transferred among family that retain control or own the majority of the ownership interests. These potential changes in valuation discounts would take effect on the date of enactment.

Other Proposed Changes Impacting Estate and Gift Planning
While the above items highlighted will likely have the broadest impact, there are some other changes that should also be considered as follows:

  • Intentionally defective irrevocable grantor trusts (IDIGTs) will be considered owned by the grantor and therefore included in the grantor’s estate and the beneficiaries would not receive a step up in basis. However, IDIGTs created prior to the enactment of the For The 99.5 Percent Act will be grandfathered.
  • Grantor Retained Annuity Trust (GRAT) would be required to have a minimum of 10 years term and a maximum of life expectancy of the annuitant plus ten years.
  • Annual exclusion limits for certain transfers including to trusts and family entities.
  • Multi-generational trusts could have a 50-year term limit.
  • Like-kind exchanges may be taxed for gains above $500,000.
  • The IRS is expected to get additional funding which will lead to more oversite.

These proposed changes have not yet been signed into law. However, they give insight into what may be coming in the near future. These proposals have significant estate and gift tax implications, so individuals with estates over $3.5 million should be considering their planning options before any of these proposals becomes law. It’s important to consider that many of the proposals under the For The 99.5 Percent Act would be effective as of the enactment of the Act and not at the beginning of the year. Proposals are often modified, so continue to follow updates as it unfolds.

View our previously recorded webinar on this subject, Prepare for Potential Estate and Gift Tax Law Changes – Valuation Considerations for Business Owners.,