The following article appeared in the August 2021 edition of Heritage.

Changes to federal tax laws could happen as early as January 1… ..2021. You read correctly. There are currently three major proposals to amend federal income tax and transfer laws, one of which would impose transfers retroactively to January 1 of this year:

The For The 99.5% Act, introduced by Senator Bernie Sanders, focuses on transfer taxes and would reduce current tax exemptions on estates, gifts and generational leap transfers (GST). Instead of the current combined gift and inheritance tax exemption of $ 11.7 million ($ 10 million, adjusted for inflation), as well as a GST exemption of ” an equal amount, the inheritance tax and GST exemptions would be reduced to $ 3.5 million (not to be adjusted for inflation) and the gift tax exemption would be further reduced to $ 1 million. Transfer tax rates would also be increased by replacing the current flat rate of 40% with a progressive rate system, which would include rates ranging from 45% to 65%. Other major changes would limit a donor’s ability to take discounts in valuing certain assets; restrict the use of FREEs (annuity funds kept by the grantor); radically change the treatment of transferor trusts (whose income is currently taxed directly to the donor during the donor’s lifetime rather than to the trust); limit the ability to take advantage of generation leap planning; and greatly limit the options for making annual exclusion gifts. The effective date of the rate and exemption changes would be January 1, 2022, but many of the other changes would come into effect on the enactment date.

The most notable change proposed by the “Wise Taxation and Promotion of Fairness Act (STEP)” would eliminate the current base mark-up, which allows the beneficiary of an asset to use the fair market value of the asset. an asset at the date of the donor death as the asset base for income tax purposes. Instead, the STEP Act would treat transfers of assets appreciated at death as realization events for capital gains tax purposes and similarly treat lifetime transfers to and from trusts as whether they were sales subject to capital gains tax (with certain exemptions, such as transfers to spousal trusts or a charity). The proposed effective date of this law is January 1, 2021. Thus, any transfer made this year before the enactment date could be subject to these rules. Similar legislation introduced in the House of Representatives has a proposed effective date of January 1, 2022.

The Biden Administration’s “American Families Plan” Tax Proposals (“Administration Proposal”) focus on the treatment of capital gains. In addition to increasing capital gains tax rates for individuals with adjusted gross income exceeding $ 1 million, the “Green Paper” description of the Administration Proposal includes changes similar to those proposed in the Administration Proposal. STEP law. However, in some ways these changes would be more extensive as they would treat transfers not only to trusts, but also to partnerships and other unincorporated entities, as sales. In addition to its tax rate proposals, the administration proposal would generally come into effect on January 1, 2022.

The STEP law and the administration proposal represent dramatic changes that would effectively create a new capital gains tax on transfers of valued property. However, neither the Administration Proposal nor the STEP Act includes changes to the current gift, inheritance or GST tax exemption or rates, or many of the other transfer tax changes. proposals included in the For The 99.5% Act. Statements made in connection with the administration’s proposal issuance indicate that the Biden administration believes the changes made by its proposal would be so significant that changes to the transfer tax regime, such as those proposed by the Law For The 99.5 percent, would not be necessary or appropriate.

Any increase in anticipated tax burdens will influence future planning, but, in particular, the unique nature of some of the current proposals could also significantly affect the treatment of past wealth transfers. This could include not only the retroactive application of the tax to donation transactions completed in 2021 before the date of enactment, as proposed by the STEP law, but also the possible imposition of a capital gains tax. on trusts (and in the case of the Administration’s proposal, partnerships and other legal persons) that own property that has not been the subject of a recognition event, such as a sale, since under 21 (in the case of the STEP law) or, failing that, 90 (in the case of the proposed administration). Such an application could have far-reaching implications for trusts and other entities created decades ago (because the trial period begins January 1, 1940 in the case of the proposed administration), and / or l ‘Imposition of significant limitations that could affect existing trusts that are part of a long-term donation program.

Unlike many previous legislative changes in this area, the proposed legislation will not only affect planning for very high net worth clients. These changes could result in taxes being imposed and impact lifelong giving and estate planning for clients across the wealth spectrum.

For various reasons, many clients are currently interested in donating and / or establishing family trusts. Specifically, many clients are considering such planning in order to transfer their wealth in a tax-efficient manner to family members – for example, through freebies intended to “lock in” the current high levels of exemption before they are released. reduced (which, without the adoption of new legislation, will take place on 1 January 2026). However, Congress is only beginning the process of reviewing budget proposals that would include these tax changes and this process is expected to last until the fall. Given the uncertainty of any final legislation, as well as the unique nature of each individual’s estate plan, there is no “one size fits all” solution to avoid the possible implications of the proposed tax legislation.