UPDATE: Proposed Changes to the Federal Tax Code Affecting Tax and Wealth Management Clients – Tax

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UPDATE (8/11/21). Welcome to the legislative roller coaster! For now, we can all breathe a collective sigh of relief. On November 3, 2021, the U.S. House Rules Committee (the “Committee”) released a third draft of the Build Back Better Bill, which includes updated guidance that significantly narrows the scope of previously proposed changes to the House Rules Code. federal taxes.

For more details see – https://rules.house.gov/sites/democrats.rules.house.gov/files/BILLS-117HR5376RH-RCP117-18.pdf

Specifically, the newly revised proposal eliminated provisions of the previous proposal that would have:

  • Reduced federal estate and gift exemption effective January 1, 2022 (although federal estate and gift exemption “sunset” is still expected in late 2025).
  • Change in the way grantor trusts are treated for income and estate tax purposes.
  • Modification of the valuation rules for transfers of non-trading assets.
  • Increased capital gains and top marginal income tax rates.

The third version of the Committee’s proposal still includes a potential surtax of 5% on adjusted gross income over $10,000,000 for individuals and over $200,000 for estates and trusts, as well as an additional surtax of 3% on adjusted gross income over $25,000,000 for individuals and over. $500,000 for estates and trusts.

For people who earn more than $400,000 a year and who hold more than $10,000,000 in retirement accounts, this version of proposal (1) would also prohibit those people from making contributions to retirement accounts and (2) require such persons to make annual withdrawals. 50% of the total value of their retirement accounts over $10,000,000. In addition, if the same individual’s retirement accounts exceed $20,000,000, the individual would be required to annually withdraw from any Roth IRA and designated Roth account the lesser of (1) the amount necessary to reduce the total account balance by retirement less than $20,000,000 and (2) the entire balance of such Roth IRA and Roth Designated Accounts. The two proposed changes to retirement account withdrawals and contributions would come into effect after December 31, 2028.

We are providing this update to keep you informed and will update you as the legislative process continues. Although nothing is final at this time, it is good to see the elimination of many of the previous tax proposals.



On September 13, 2021, the United States House Ways and Means Committee (the “Committee”) released draft proposed changes to the federal tax code, including significant changes affecting trusts, estates, gifts and tax rates, among other proposals.1. The most relevant of these changes are described below. Individuals will likely need prompt legal assistance to make appropriate adjustments in response to these expected changes.

Inheritance and gift exemption

Currently, individuals enjoy a federal gift and estate tax exemption of $11,700,000 (or $23,400,000 for married couples), less any taxable gifts made during lifetime. The amount of the generation-skip transfer tax exemption (“GST”) is equal to the gift and inheritance tax exemption. These exemptions are increased each year in line with inflation.

The current law is set to “end” at the end of 2025, at which time the estate, gift and GST exemptions will decrease to approximately half of their current amounts beginning in 2026. The Committee’s proposal accelerates this sunset and reduces exemptions at approximately $6,020,000 per person (or approximately $12,040,000 for married couples) beginning in 2022. For individuals who do not use all of the current $11,700,000 in exemptions available in 2021, the proposed reduction of approximately $5,700,000 in these exemptions could be lost forever.

Settlor Trust Transactions

Some of the most significant changes in the Committee’s proposal relate to trusts that are considered “settlor trusts” for income tax purposes. Grantor trusts are trusts that are not included in the creator’s (or grantor’s) estate for estate tax purposes, but which treat the grantor as the owner for income tax purposes. Under the proposed amendments, assets transferred to a grantor trust created or funded after the enactment of the new law would be eligible (1) to be included in the grantor’s estate for estate tax purposes and (2 ) recognition events for income tax purposes. In addition, a distribution from a grantor trust to persons other than the grantor or his or her spouse would be treated as a taxable gift by the grantor during the grantor’s lifetime.

Existing grantor trusts would not be subject to these rules. However, to the extent that a contribution is made to an existing grantor trust after the effective date of the proposed legislation, the portion of the assets of the trust attributable to the contribution would be subject to the new grantor trust rules. transferor. Such contributions would likely include a donation or sale, and possibly other transactions. These rules would significantly reduce, if not entirely eliminate, the use of trusts such as Spousal Lifetime Access Trusts (commonly referred to as “SLATs”).

The proposed rules would also radically change the taxation of retained annuity trust (“GRAT”) income. Concretely, according to the law in force, when an annuity is paid to the settlor from the GRAT, there is no tax consequence. However, under the proposed changes, there would be a recognition event for income tax purposes each time a GRAT annuity payment is made using an appreciated asset. In other words, whenever GRAT makes a mandatory annuity payment to the grantor, the grantor would be liable for income tax on the distribution as if the distribution were a sale (unless the distribution had was made in cash).

Valuation rules for transfers of non-trading assets

The Committee also proposed to eliminate the lack of negotiability and fractional interest valuation discounts for interests in entities held on death or given away during the lifetime of a transferor where such entities own non-trading assets or liabilities. , including cash, stocks, personal property and other similar assets. Real estate would also be treated as passive assets unless the transferor “materially participates” in the management of the business.

Other tax changes

  • The capital gains rate would increase to 25% (effective September 13, 2021).
  • The top marginal tax rate would be 39.6% for individuals earning more than $400,000 and married couples earning more than $450,000.
  • A 3% surtax would be imposed on individuals with adjusted gross income over $5,000,000 and estates and trusts with adjusted gross income over $100,000.
  • Individuals with retirement accounts totaling more than $10,000,000 and earning more than $400,000 (or $450,000 for married couples), would (i) be prohibited from making additional contributions to their accounts and (ii) required to make annual account withdrawals of 50% of value over $10,000,000 and 100% of value over $20,000,000.

What actions should individuals take?

Based on the proposed changes, individuals should consult with their trust and estate attorney to better understand what steps to take now and how the committee’s proposal may affect their current estate planning. Many of the proposed changes will come into effect immediately upon promulgation of the Committee’s proposal. For example, many of the changes being considered would affect people planning to use their existing exemptions in 2021. Rather than waiting to see what tax code changes will eventually pass into law, early consultation is advised at this point. .


1. Here is the original proposal: https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/NEAL_032_xml.pdf

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.


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