As Congress continues to negotiate the Build Back Better Act (BBBA) and changes to estate and gift tax provisions are being considered, many Americans are likely wondering what they can do now to prepare for upcoming changes. Unfortunately, at this point there is no certainty. No one knows what will change or stay the same or even if the BBBA will be enacted.
What we do know, however, are the types of changes that are currently being considered. Following are some of them.
BBBA is expected to include a revision to the allowable gift and estate tax exemption. Currently and until 2026, the exemption is set at $11.7 million, adjusted for inflation. Revisions under consideration include reducing this exemption by varying amounts and with varying effective dates. While current law provides for the same exemption amount for estates and gifts, at least one proposal would reduce the exemption for estate tax purposes, but would reduce the exemption amount for gift tax purposes even more. This would likely cause more gifts to be taxed.
What this could mean to you: If your estate is valued over the exemption, your estate could incur an estate tax of 40 percent. In response, you may already be thinking about gifting the amount above the expected exemption as an attempt to avoid the tax. But, because the numbers are again uncertain at this time, the amount gifted may be too much or not enough. Furthermore, depending on the effective date of the enactment, you may find it already too late to protect yourself against the tax by gifting.
Other anticipated changes are to disallow valuation discounts for transfers in entities that hold nonbusiness assets, requiring grantors’ estates to include grantor trusts in their taxable estates and treating transactions between a grantor and grantor trust as taxable. There are also various income tax provisions that will have an impact on estates and trusts and overall estate planning by increasing rates and capping deductions.
Prior versions of the Act proposed ending the stepped-up basis and included taxing the appreciation of assets upon the transfer from an estate or as a gift. These provisions are not in the current version of the Act.
What should you do? Review your current estate plan with your tax advisor and identify the potential issues such as assets that exceed the expected reduced exemption, grantor trusts that may end up being included in your estate, trusts with provisions that will face higher income taxes, etc. Determine what your options are if there are changes. If you do decide to act now or engage in some sort of planning, be sure to incorporate flexibility in your planning devices. Any planning may inadvertently cause a taxable situation that may need to be modified. In short, flexibility may be necessary to avoid possible issues such as these listed below:
- Estate taxes on amounts that exceed the exemption
- Income taxes that may be imposed on a sale to a grantor trust
- Inclusion of grantor trust assets in the grantor’s estate
- Trust income tax rates (which could be as high as 46.4 percent) on incomes starting at about $13,000
Until we have more certainty on what will happen, we suggest that you, as the taxpayer, proceed cautiously and stay tuned. If you have questions, please feel free to contact a LaPorte estate planning professional.