Estate Planning, Tax Planning

Two Proposed Estate Tax Changes That Could Be Enacted by Year’s End

by Alli Thomas

Oct 26, 2021

In May, we discussed several changes to federal estate and gift tax laws that were proposed by Senator Bernie Sanders. 

Some of those proposed changes are now being discussed by the House Ways and Means Committee as ways to help pay for the proposed $3.5 trillion “Build Back Better” plan.

Though Congress is discussing many potential options, today we’re going to review two significant proposed changes to estate planning laws that they’re looking at:

  • Lowering the estate and gift tax exemption amount 
  • Changing grantor trust rules 

Proposed Changes to the Estate and Gift Tax Exemption 

The current gift and estate tax exemption is $11.7 million per person, adjusted annually for inflation. This is high enough to protect most estates from paying the tax.  

Under current law, the exemption is set to revert to $5 million per person (adjusted for inflation) in 2026. 

The Sanders proposal wanted to lower the estate tax exemption to $3.5 million without adjustments for inflation, while the lifetime gift tax would have been reduced to $1 million. 

Those more substantial reductions to the exemption are not included in House plan.  

Instead, the reduction to $5 million would take place on to December 31, 2021, rather than in 2026.  

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Proposed Changes to Grantor Trust Rules 

Grantor trusts were not specifically included in Sanders’ proposals, which only addressed gift sizes to irrevocable trusts and transfer taxes for dynasty trusts. 

A grantor trust is an estate-planning vehicle makes the grantor (not the trust) responsible for paying taxes on its income.  

The grantor trust allows the grantor to maintain some control over an irrevocable trust, such as changing the trust’s assets and named beneficiaries.  

For federal income tax purposes, the assets in a grantor trust are considered owned by the grantor. As such, they aren’t usually part of the grantor’s taxable estate.  

Here’s how that would change under the new tax proposal:
 

1. All assets of any grantor trust would be includible in the grantor’s gross estate for estate tax purposes.

2. Distributions from a grantor trust would also be treated as taxable gifts. 

Under current law, distributions are gift-tax-free.  

This new rule would apply to trusts created on (or after) the new law goes into effect. 

It would also apply to any contributions made on or after the date that the law is enacted, even if the trust was established earlier. 

3. Sales between the trust and the grantor would be fully taxable.

Additionally, in-kind distributions would count as taxable capital gains  

Currently, these are tax-free because the grantor and the trust are considered the same taxpayer.  

Act Now to Take Steps That Can Help Protect Your Estate  

While these proposed changes still must go through the Senate, which may create its own version, anyone who would be affected by the new rules should talk to your estate planner or financial advisor as soon as possible. 

Since the new rules could go into effect on January 1, 2022, any asset reallocations or distributions designed to reduce or avoid exposure would have to take place before the end of the year.  

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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