Build Back Better Plan Tax Proposals May Affect Your Estate Plan

A wave of proposed legislation could dramatically impact estate planning techniques, including gifts made through trusts. The House of Representatives approved a budget resolution in late August, and Democratic leaders continue to negotiate the attendant Build Back Better (BBB) Act with hopes that Congress will greenlight it by the end of October. If eventually passed into law, the House Ways and Means Committee’s legislative blueprint will directly transform the tax treatment of grantor trusts and introduce changes to other trust-related taxes. If you currently have trusts included in your estate plan, particularly grantor trusts, it is important to consider the ramifications these changes would have on your wealth preservation strategies.

The Impact on Grantor Trusts

One of the most significant proposed changes detailed in the blueprint calls for treating sales and exchanges between a grantor trust and its owner as taxable transactions. Currently, with a grantor trust, income tax attributable to trust assets applies to the grantor rather than the trust. So a sale or exchange between a grantor and the grantor trust currently is nontaxable because it is deemed to be a transaction with one’s self.

If the blueprint is passed, some other significant changes would cause:

  • Assets owned by a grantor trust to be included in the grantor’s estate and subject to estate tax upon the grantor's death.
  • Distributions from a grantor trust to be considered taxable gifts.
  • All trust assets to be treated as taxable gifts if the grantor trust status ceases.

All of these changes would apply to trusts created after the date of the BBB Act enactment, or to contributions made after the date of the BBB Act enactment into previously-existing trusts.

Because the new legislation could negate many of the benefits of a grantor trust, non-grantor trusts may become a more appealing vehicle.

Other Changes Proposed

The blueprint for the BBB Act also would curtail the ability to mitigate a donor’s gift tax consequences by denying any valuation discounts for nonbusiness assets based upon the transfer of a minority ownership interest in the transferred property. This proposal would apply to transfers made after the date of the BBB Act enactment.

Some notable income tax changes in the blueprint would take effect in 2022, and include a 3% surtax on taxpayers with an adjusted gross income (AGI) exceeding $5 million. But that threshold is only $100,000 for trust and estate income, unless the trust is specifically for religious, charitable, or educational purposes.

Also under the blueprint, the 20% deduction for qualified business income would be capped at $500,000 for married individuals filing a joint return, $400,000 for single filers, and $250,000 for married individuals filing seprate returns. But for trusts and estates, the cap would be only $10,000. Currently, there is no limit to the amount that can be deducted. This change would also take effect in 2022.

The benefits under Section 1202 involving Qualified Small Business Stock (QSBS) for estates, trusts, and higher income taxpayers face limitations under the plan as well. Currently, assets that meet the Section 1202 requirements are eligible for a capital gains exclusion of up to 100% of the gain on sale, limited to the greater of $10 million in capital gains or 10 times the basis of the taxpayer’s investment. However, the proposed changes would limit gains eligible for the exclusion to 50% for taxpayers with an AGI exceeding $400,000. Trusts and estates — regardless of income level — would only qualify for a 50% exclusion. This change would take effect for sales and exchanges after Sep. 13, 2021, subject to a binding contract exception.

The Impact on Estate Planning

If these tax provisions go into effect, you may want to re-evaluate your use of trusts. Keep in mind that if you consider a non-grantor trust, the planning process may be a little more involved. Non-grantor trusts involve many intracacies not applicable to grantor trusts, and require consultation with attorneys who are familiar with state law involving trusts in your state of residence.

For More information

No matter the outcome for the legislation, it's essential to sit down with a tax professional as soon as possible to evaluate how these changes could potentially affect your estate plan. To speak with a CBIZ tax professional, please contact usPublished on October 26, 2021