Estate and Gift Tax Planning: Uncertainty Still Remains as the 2021 Tax Year Comes to A Close

By George Grzywacz, CPA, JD – Shareholder

As we approach the end of the 2021 tax year, many high-net-worth individuals are still contemplating year-end gifting strategies in light of the Biden administration’s proposed estate and gift transfer tax changes in the Build Back Better Act (BBBA).

Current Estate and Gift Tax Environment

For 2021, the estate and gift tax basic exclusion amount is $11.7 million, which also equals the Generation Skipping Transfer Tax (GST) exemption amount. Once the basic exclusion amount is fully utilized, a maximum 40% tax rate is applied to taxable transfers in excess of $1 million. The basic exclusion amount (adjusted annually for inflation) and the 40% maximum tax rate were legislated to remain in place until 2025, which would have left taxpayers and estate planners three more years to plan and execute their gifting strategies.

However, the Biden administration, through the BBBA, would make significant changes to the current estate and gift tax landscape. If enacted, it would increase an individual’s estate and gift tax exposures. Several of these changes would be effective Jan. 1, 2021, while others would become effective upon the BBBA’s enactment.

Proposed Changes

The basic exclusion amount would be reduced to approximately $6 million, as well as the GST exemption. That’s an approximate $5.7 million loss in the basic exclusion and GST exemption amounts, which would become effective Jan. 1, 2022.

The BBBA would also eliminate valuation discounts on nonbusiness, otherwise known as passive assets, that are not used in the conduct of an active trade or business. This would include corporate stock or any equity, profits or capital interest in a partnership. Which is a significant change in the valuation rules, as the value of these types of interests are often discounted due to lack of control or marketability. This would increase the value on the transfer of these types of interest and would be effective upon enactment of the BBBA.

If passes, the BBBA will remove the various beneficial tax planning strategies of grantor type trusts by pulling the value of these trusts back into the grantor’s estate at death, or by treating distributions from these trusts made during the grantor’s lifetime to certain beneficiaries as gifts. It also requires the recognition of sales transactions between a grantor and their grantor trusts for income tax purposes that have historically been ignored.  These new rules will generally only apply to trusts that are created and funded after the date of enactment.  However, it is not clear if a supposedly grandfathered trust could be pulled within these rules if contributions are made to the trust, or a grantor power terminated after the enactment date.

The BBBA does offer one positive in the estate tax area: it will increase the available reduction in fair market value for qualified real property (i.e., certain types of farm and business properties), which is currently at $ 1.9 million. Under the BBBA, this reduction amount will be increased to $11.7 million effective for tax years starting after Dec. 31, 2021.

What To Do?

It is hard to say if, or when, the BBBA might be enacted, making the changes discussed above effective. It is also possible that under a future administration they would be altered and or reversed – given estate and gift tax laws seem to be a constant focus of each new administration.

Although we cannot know the future, Doeren Mayhew, along with the other members of your estate planning team, can discuss how these changes could impact your current estate planning and trust structuring. This may warrant additional gifting by the end of 2021 to take advantage of the current basic exclusion amount, or recommendations to fully fund and alter the terms and conditions of existing grantor type trusts so they do not run afoul of these new rules.

Regardless of the above proposed changes, the focus of your planning strategies should be to address your needs and objectives. Although tax planning plays a role here, it should not be the only factor driving your planning decisions if doing so will not meet your future needs and objectives.

Contact Doeren Mayhew’s CPAs to discuss your unique year-end estate and gift tax planning needs.