It’s only a matter of time before the proposed federal estate tax legislation takes effect on estate planning strategies. You’ll probably not have read the 881 pages of the legislation or the House Budget Committee’s Report by January 1, 2022, when all the confusion begins. But that shouldn’t stop you from learning about the basic changes this proposed legislation brings forth and what is in store for you.
Here’s an overview of how this pending budget bill would potentially affect estate planning, helping you avoid getting caught up with new estate taxes and laws.
What’s New About the Federal Estate Tax Legislation?
Part of President Biden’s “Build Back Better Act” is to reduce taxes and lower the costs for working families. As a result, the proposed legislation has a higher impact on high-income and high-net-worth individuals than low-income earners. In a nutshell, the law proposes to:
- Eliminate valuation discount for non-business assets.
- Eliminate grantor trust benefits.
- Increase tax for high-income earners.
- Put limits on Qualified Small Business Stock exclusion.
- Reduce gift, estate, and Generation-Skipping Transfer (GST) tax exclusion.
Therefore, if you’re planning for your estates, including cars, houses, money in the bank, businesses, and so on, you’ll want to do so with the least amount of taxes involved. And as you already know, estate planning is one of those tasks you can’t procrastinate about because life is always unpredictable.
Here’s a breakdown of what the legislation proposes.
Estate Tax Exemption Amount Reduces to $5 Million
Currently, the federal tax exemption amount for gifts, estate, and Goods and Services Tax is $11.7 million for an individual. However, things are meant to change in 2022. The new law proposes to reduce the amount to $5 million per individual and double that for couples.
Ideally, this should’ve happened in 2026 as the scheduled inflation adjustments. However, the new law aims at speeding up this process with the future exemption amount projected at $6 million.
That means if your estate’s worth (including gifts and GST) is below the new exemption amount, it won’t be subject to tax when you die after December 31, 2021. So, instinctively, you may want to consider “gifting” your estate tax exclusion and the GST amounts before the end of the year to reduce the taxable estate. However, that choice will also have a few downsides if the legislation becomes law.
No More Grantor Trust Benefits
Upon enactment of the new law, some grantor trust benefits will no longer be applicable. Beginning 2022, the following changes will be enforced on a grantor’s estates:
- Any estate owned by the grantor’s trust would be subject to the grantor’s taxable estate upon their death.
- Any gifts through a grantor’s trust during their lifetime would be treated as taxable gifts.
- A grantor’s contribution to the trust will be deemed a taxable gift if the grantor is no longer the owner of the trust.
- Any transfers between the grantor and the grantor’s trust would be taxable.
Before then, you can take advantage of the current grantor trust benefits with a little help from an expert estate planning attorney.
No Valuation Discount for Nonbusiness Assets
Now would be the best time to plan for that unused land, unallocated cash, or unoccupied property because you won’t have more valuation discounts beginning 2022. If you transfer such property after the enactment date of this law, they’ll be valued at the full market value without any discounts.
If you already have an estate plan that covers all your nonbusiness assets, you’ll need to adjust it to suit the new laws. That may not be an easy decision to make within a limited period, but it’s the only choice that determines how your assets will be distributed in your absence.
Higher Taxes For High-Income Earners
The following tax rate changes will affect high-income earners beginning 2022:
- Income tax rate for the top marginal individuals, estates, and trusts would increase to 39.6% from 37%.
- Long-term capital gains would increase to 25% from the current 20%.
- 3% surcharge tax on trusts and estates on income over $100,000 based on their Adjusted Gross Income.
Qualified Small Business Stock Exclusion
Lastly, estate owners with an AGI of $400,000 and above would be allowed to exclude 50% of the sales gains from the Qualified Small Business Stock (QSB). This will include sales made beginning September 13, 2021.
The proposed legislation is still awaiting approval from House Committees, the full House of Representatives, and the Senate before it becomes law. However, there could be a few changes here and there, but only time will tell. Before then, the most effective estate plan is one that considers all the changes this legislation will bring once it becomes law.
To further understand federal estate tax legislation and estate planning, schedule a free consultation with an attorney at Antanavage Farbiarz PLLC. By doing so, you’ll avoid the last-minute rush and stress that comes with the enactment of new legislation.