Build Back Better Act: What You Need to Know about the Potential Impact on Your Estate Planning
The Build Back Better Act (the "BBBA") is proposed legislation released by the House Ways & Means Committee on September 13, 2021. Much like President Biden's previously released tax plan, the BBBA seeks to increase taxes on high net-worth taxpayers, close "loopholes," and give the IRS more resources to enforce the tax laws. While, the BBBA does not include some of Biden's more controversial proposals (e.g., elimination of basis step-up at death and imposition of income tax on gifts of appreciated property), the BBBA, if passed, will make certain common gift and estate tax-reduction techniques either obsolete or limited in nature.
The BBBA proposes to make numerous changes to current tax laws that may impact high net-worth individuals. The following are four proposed changes we expect to have the largest impact on estate tax planning for our high net-worth clients:
- Valuation discounts on transfers of partial interests in passive assets held for the production of income and not used in the conduct of a trade or business (non-business assets) will be eliminated on or after the effective date of the BBBA.
- The value of assets transferred to grantor trusts on or after the effective date of the BBBA will be pulled back in to the grantor's taxable estate on death and subject to estate tax. This means that (with rare exception) if you have a life insurance trust in place, any future gifts to it to pay premiums will cause a portion of the trust to be taxable in your estate.
- Sales between grantors and their grantor trust on or after the effective date of the BBBA will be treated in the same manner as a sale between a third-party and the trust. In other words, such sales will be subject to immediate income tax.
- Effective January 1, 2022, the temporary increase in the unified credit against estate and gift taxes (now $11,700,000 per person) will revert to its 2010 level of $5,000,000 per person, indexed for inflation (which we expect will be approximately $6,000,000 in 2022). This means that the estates of individuals worth over approximately $6,000,000 and of married couples with assets over $12,000,000 will be subject to estate tax.
If the BBBA is signed into law, it will likely foreclose or limit your opportunity to engage in certain estate tax planning/reduction strategies for the foreseeable future. However, there are some actions that you may be able to take now to reduce your current estate tax burden, including:
- Creating a new Irrevocable Life Insurance Trust or reviewing one already in place
- Using any remaining Gift Tax Exemption Amount
- Creating a new Intentionally Defective Grantor Trust or making a "last" gift or sale to an existing grantor trust
Although it is unclear when the proposed amendments to the tax law will come into effect under the BBBA, we believe it will likely happen sometime between the end of this month and January 1, 2022. This creates a very short window of opportunity to complete transactions currently under consideration or to make new adjustments to your current estate plan.