According to the White House, the Build Back Better Act is “an ambitious plan to create jobs, cut taxes, and lower costs for working families – all paid for by making the tax code fairer and making the wealthiest and large corporations pay their fair share.”
What exactly does that mean?
The Build Back Better Act proposes to lower childcare costs, higher education costs, prescription drug costs, health care costs, and housing costs. In addition, it proposes to provide tax cuts to families with children and low-wage workers without children.
President Biden proposed his plan to pay for the $3.5 trillion Build Back Better Act. There are numerous changes across all areas of taxes, but for the purpose of this blog post, we will focus on how this will affect estate planning.
Before we get into the changes, we want to remind you that the Build Back Better Act remains proposed legislation that requires passage by the House and Senate. Most likely, there will be revisions before the bill becomes law.
The 5 Changes You Need to Know
1. Decrease the Gift and Estate Tax Exemption
Currently, the gift, estate, and GST tax exemptions are each $11.7 million per person in 2021. This exemption is scheduled to decrease to $5 million, adjusted for inflation on January 1, 2026. The proposal changes this to 2022, meaning the transfer tax exemptions will be cut in half effective January 1, 2022. Why is this important to you? If you are looking to take advantage of the current higher exemptions, you should explore making gifts before the end of the year.
2. Valuation of Non-Business Assets
Many family entities funded with marketable securities utilize a common estate planning strategy to transfer non-publicly traded assets and have those assets appraised at a low valuation. The proposal would no longer allow for this strategy.
3. Income Taxation on Sales to Grantor Trusts
The income and deductions associated with grantor trust assets are reported on the grantor’s tax return for income tax purposes. In the past, a common strategy used by estate planners has been to sell assets to the trust in exchange for a low-interest rate promissory note. It is an effective strategy for transferring wealth estate tax-free so long as the assets sold to the trust appreciated by more than the interest rate on the note. The proposal would require the gain be recognized on such sales but would not recognize or report a loss.
4. Estate Taxation of Grantor Trusts
Trusts created on or after the legislation becomes law will not face the following changes.
Grantor Retained Annuity Trusts – These are some of the most used estate planning strategies. The person transfers assets to a trust and receives a series of payments over the next couple of years that equate to the value of the original property. If the assets increase in value, the owner can receive the value of the assets without paying estate or gift tax. Now, at the end of the term, if the trust transfers assets to a continuing grantor trust, the assets will still be subject to estate tax. The proposal would make grantor retained annuity trusts irrelevant as there will be no benefit in the future.
Insurance Trusts – Insurance trusts are designed to ensure the death benefit is not subject to estate tax. The premium payments owed on the insurance policy are generally paid by making annual gifts to the trust. Payment of future insurance premiums will be an additional contribution to the trust and subject to estate tax.
Spousal Lifetime Access Trust – Naming your spouse as a trust beneficiary is now classifies that trust as a grantor trust. Now it will be harder to create an irrevocable trust for your spouse’s benefit without subjecting the assets of that trust to estate tax.
5. Increased Relief for Certain Real Property Used in Farming or Other Trades or Businesses
The proposed legislation allows property used for farming or similar trade to be valued based on that use and not on the actual fair market value. There are several technical requirements, but this proposal represents material relief from the estate tax for those who qualify.
Take advantage of the Tax Savings that will be lost with upcoming changes! Contact Sheryll Law, P.C. To Schedule A Strategy Session and evaluate your best options for you and your family. Keep your hard earned money within your family!
Click Here to Schedule A Strategy Session to Evaluate your Best Options
An estate planning attorney is there to guide you in all aspects of updating your plans in light of any new possible tax changes. This year, more than ever, it is critical to have a relationship with an estate lawyer you can trust to help you protect your personal assets and align your business tax strategy. At Sheryll Law, P.C., our experienced estate planning attorneys work diligently on your behalf to ensure that your estate plan addresses your unique needs and circumstances amid changing legislation.
If you have questions about the implications of the Build Back Better Act, speak with a trust and estate attorney on the East End of Long Island about your options and create or review your personalized plan. Call us at (631) 506-8440 or complete our online form to schedule a consultation.
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The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information in this post should be construed as legal advice from the individual author or the law firm, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting based on any information included in or accessible through this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.
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Riverhead, New York 11901
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