Impact of Potential Tax Legislation on Inheritance

By: Corey Moore – Published in the BizWest Thought Leaders in October 2021

On September 12, 2021, Representative Richard Neal, Chairman of the House Ways and Means Committee, released the long-awaited details on the Democrats’ funding proposal for the $3.5 trillion American Families Plan.  Outlined below are the proposals that, if passed, would have a significant impact on lifetime gifts and the inheritance one would receive upon the death of a loved one.

1. Gift and Estate Tax Exemption: Under current law every taxpayer is entitled to a combined estate and gift tax exemption of $11.7 million. Under the House’s proposal, the exemption would be cut to approximately $6 million (inflation-adjusted).

This proposal is effective for gains on January 1, 2022.

2. Use of Grantor Trusts: Grantor trusts are a useful tool under current tax regulations which allow an individual to remove the assets from one’s estate by gift and/or sale. The House’s proposal seeks to severely limit the use of grantor trusts by classifying distributions from such a trust as a gift for gift tax purposes and classifying the sale of assets to such a trust as a sale to a third party, and thus subject to tax on any gain.

The proposed restrictions on grantor trusts would apply to (i) trusts created on or after the date of enactment (i.e., when the President signs the legislation), and (ii) to any portion of a trust established before the date of enactment which is attributable to a contribution made on or after the date of enactment.

The House’s proposal does not include many of President Biden’s proposals released early this year, including the following:

  1. Repeal of the “step-up” in basis at death.
  2. Deemed recognition of capital gain at death.
  3. Limitations on Section 1031 exchanges.

The final version of any tax legislation will certainly be heavily negotiated in Congress and there’s certainly no guarantees that the House’s proposals will be enacted. The most important takeaway is the fact that estate and gift tax laws now appear likely to change, perhaps dramatically. Those who have postponed implementation of lifetime wealth transfer strategies should execute those plans as soon as possible.

Corey Moore