UPDATE: Proposed Federal Tax Code Changes Affecting Tax and Wealth Management Clients | Schnader Harrison Segal & Lewis LLP

UPDATE (11/8/21). Welcome to the legislative roller coaster! For now, we can all breathe a collective sigh of relief. On November 3, 2021, the United States House Rules Committee (the “Committee”) released a third version of the Build Back Better Bill, which includes updated guidelines significantly reducing the scope of previously proposed changes to the tax code. federal.

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

In particular, the newly revised proposal eliminated provisions from the previous proposal which would:

Reduction of the federal inheritance and gift tax exemption from January 1, 2022 (although the “sunset” of the federal inheritance and gift tax exemption is still expected at the end of 2025 ).

Change in the way transferor trusts are treated for income and estate tax purposes.

Modification of valuation rules for transfers of non-commercial assets.

Increased capital gains and top marginal tax rates.

The third version of the Committee’s proposal still includes a potential 5% surtax on adjusted gross income greater than $ 10,000,000 for individuals and greater than $ 200,000 for estates and trusts, plus an additional 3% surtax. 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 have more than $ 10,000,000 in retirement accounts, this version of the proposal would also (1) prohibit such people from contributing to retirement accounts. and (2) to require such persons to make annual withdrawals. 50% of the aggregate value of their retirement accounts over $ 10,000,000. In addition, if the same person’s retirement accounts exceed $ 20,000,000, the person would be required to withdraw each year from any Roth IRA and designated Roth account the lesser of (1) the amount necessary to reduce the total account balance. pension less than $ 20,000,000 and (2) the entire balance of such designated Roth IRA and Roth accounts. The two proposed changes to withdrawals and contributions from retirement accounts would come into effect after December 31, 2028.

We are providing this update to keep you informed and will keep you informed as the legislative process continues. While nothing is final at this time, it’s 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 rates. tax, among other proposals. The most important of these changes are described below. Individuals are likely to need prompt legal assistance to make the appropriate adjustments in response to these expected changes.

Exemption from inheritance and donation

Currently, individuals benefit from a federal gift and inheritance tax exemption of $ 11,700,000 (or $ 23,400,000 for married couples), less taxable gifts made during their lifetime. life. The amount of the generational transfer transfer tax exemption (“TPS”) is equal to the gift and inheritance tax exemption. These exemptions are increased each year according to inflation.

The current law is expected to expire at the end of 2025, when the inheritance, gift and GST exemptions will decrease to about half of their current amounts as of 2026. The Committee’s proposal accelerates this sunset and reduces the exemptions to about $ 6,020,000 per person (or about $ 12,040,000 for married couples) starting in 2022. For people who do not use all of the $ 11,700,000 exemptions currently available in 2021, the decrease of the proposed $ 5,700,000 of these exemptions could be lost forever.

Grantor’s Trust Transactions

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

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

The proposed rules would also significantly change the taxation of income from grantor-retained annuity trusts (“FREEs”). Concretely, in current law, when an annuity is paid to the settlor from the FREE, there are no tax consequences. However, under the proposed changes, there would be a recognition event for income tax purposes whenever a FREE annuity payment is made using a valued asset. In other words, whenever the FREE pays a required annuity to the grantor, the grantor would be liable for income tax on the distribution as if the distribution were a sale (unless the distribution was carried out in cash).

Valuation rules for transfers of non-commercial assets

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

Other tax changes

The capital gains rate would rise to 25% (as of September 13, 2021).

The top marginal tax rate would be 39.6% for people earning over $ 400,000 and married couples earning over $ 450,000.

A 3% surtax would be imposed on individuals with adjusted gross income greater than $ 5,000,000 and estates and trusts with adjusted gross income greater than $ 100,000.

People 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 retirement accounts. retirement and (ii) required to make annual account withdrawals of 50% of the value greater than $ 10,000,000 and 100% of the value greater than $ 20,000,000.

What actions should individuals take?

Based on the proposed changes, individuals should consult with their trust and estate lawyer to better understand what steps should be taken now and how the committee’s proposal may affect their current estate planning. Many of the proposed changes will come into effect as soon as the Committee’s proposal is enacted into law. For example, many of the changes being considered would affect people who plan to use their existing exemptions in 2021. Rather than wait and see which tax code changes are ultimately passed into law, a quick consultation is advised at this point.

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