Bill to modify the tax planning of inheritances and donations | Stoel Rives srl

Democrats recently unveiled the Build Back Better Act, which, if passed, would make significant changes to the Tax Code and have a drastic impact on common estate planning techniques, including giving to trusts. The House Ways and Means Committee approved the plan on September 15, 2021, and now the legislation must go through the House Rules Committee and the House as a whole before going to the Senate.

This alert focuses on estate planning changes, which include the reduction of inheritance, gift and generation skipping exemptions (also known as “transfer tax”). Aspects of estate planning will be addressed in a future alert on proposed changes subjecting certain irrevocable transferor trusts to inheritance tax and attempting to overhaul the income tax rules for “transferor trusts”. We will also cover proposals to increase tax rates on ordinary income and capital gains for high incomes in a future alert. Please note that this is only a private member’s bill and will almost certainly change before it is enacted.

Fewer gift and inheritance exemptions

The proposals reduce the federal inheritance and gift tax exemption from $ 11.7 million (adjusted for inflation for 2021) to $ 5 million (adjusted for inflation) at Effective January 1, 2022, instead of January 1, 2026. The inflation adjusted exemption is expected to be approximately $ 6 million.

Some potential changes that had already been discussed did not appear in this proposal. The 40% rate of inheritance and gift tax has not changed. Changes in inheritance and gift tax are not retroactive. There is no limit on the number of annual exclusion gifts, and Generation or Dynasty leap trusts are not limited to 90 years if they are governed by state law that allows for a term longer.

Since the reduced exemption does not take effect until January 1, 2022, there is a possible tax planning period before the impending changes. We recommend that you consider using the 2021 exemption to move assets out of your estate by December 31, 2021 (or before enactment, if transferor trusts are used). For example, if you plan to donate using your remaining tax and / or GST exemption amounts, but are concerned about the potential for retroactivity, the proposed changes may provide enough comfort for you to proceed with the proceeds. donations before the end of 2021. If you are considering a complex strategy, such as a sale or donation to a transferor trust or the donation of discounted assets, the trust should be created as soon as possible because the changes made transferor trusts would come into effect upon enactment of the legislation, as we will discuss more about in our next alert. All of the other factors that need to be considered when donating are always factors, such as the tax implications of the loss of the base markup and the loss of control and use of the asset. These factors have been discussed in previous alerts (see Estate Planning After the Grand Opening: Should You Make Big Donations Now? and Gifts and other planning in the new political landscape).

Evaluation discounts

Appraisal discounts have been contested by the IRS for many years. If a natural person has a restricted business participation that is not listed on a stock exchange and does not have voting control, it is unlikely that a third-party buyer will purchase the participation for its liquidation value (i.e. – say the prorated value of the partnership interest underlying assets of the partnership). On the contrary, a third party buyer would want a discount on the liquidation value. For transfers of interests in a restricted entity, the proposals eliminate valuation haircuts for lack of control or lack of marketability that are attributable to non-business assets held by the entity. Non-business assets are passive assets held for the production of income and not used in the active conduct of a trade or business. Exceptions are made for assets used as working capital of a business.

This provision is designed to eliminate the strategy of creating family LLCs or limited partnerships to hold passive assets (i.e. value due to discounts for lack of market value and minority interests. This change would be effective for transfers made after the date of entry into force of the legislation, it would therefore be important to make discounted donations from entities with passive assets in the very near future. Discounts are unlikely to be available for year-end gifts entities holding passive assets.

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About Michael S. Montanez

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