Proposed Tax Legislation May Significantly Impact Estate Planning Options

The House Ways and Means Committee recently released proposed legislation that, if enacted, would dramatically alter major estate and gift planning strategies. Although further changes likely are to be made during the legislative process, the proposed bill highlights the areas targeted, as well as a timeline for when changes would become effective. Some of the most critical changes are outlined below. If you would like to discuss how the proposed legislation will affect your estate plan, or if you wish to take advantage of planning opportunities in advance of the December 31, 2021 (and possibly earlier) deadline, please contact your Ballard Spahr attorney as soon as possible. 

Reduction of Federal Exemption Amounts

The federal estate, gift, and generation-skipping transfer (GST) tax exemptions (the amount that individuals can transfer during their lives or at death tax-free) is currently $11.7 million per individual, or $23.4 million per married couple. That exemption long has been scheduled to sunset on December 31, 2025, reverting to $5 million per individual, adjusted for inflation. The proposed legislation, if enacted, would accelerate the sunset to December 31, 2021, leaving individuals with approximately $6 million in exemptions after inflation adjustments, and married couples with approximately $12 million. For those who have not yet used all of their $11.7 million in exemptions, time is of the essence—gifts must be made on or before December 31, 2021, and potentially earlier if the gift will be made to a trust (due to potential changes to grantor trusts, noted below). 

Grantor Trusts No Longer Favorable

Grantor trusts have long been valuable estate planning tools, and they are now vulnerable to significant income and transfer tax changes under the proposed legislation. If the proposed legislation is enacted as currently drafted, it would significantly limit the use and effectiveness of many grantor trusts, including certain life insurance trusts (ILITs), grantor retained annuity trusts (GRATs), intentionally defective grantor trusts (IDGTs), and spousal lifetime access trusts (SLATs). If your estate plan currently includes any of these grantor trusts, or if you have been contemplating making gifts to a grantor trust to use remaining exemptions, we urge you to contact your adviser now. Because the changes affecting grantor trusts may be effective as soon as the legislation is enacted (potentially prior to the end of 2021) and may impact pre-effective date grantor trusts, the window of opportunity to take action with respect to grantor trusts may be rapidly closing.

Discounted Valuations Available Only for Active Business Entities

The proposed legislation also would eliminate valuation discounts for transfers of interests in entities such as partnerships and LLCs that own nonbusiness assets (e.g. cash, equities, fixed income, or real estate not used in the active conduct of a trade or business).  This change may apply to transfers made after the date of enactment of the legislation (potentially before the end of 2021).  Individuals holding interests in an entity with nonbusiness assets should proceed quickly if they wish to make gifts for which they would claim a discounted value due to lack of marketability, lack of control, or the like. 

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There are many nuances and uncertainties in the proposed Federal estate, gift, and trust reforms. Ballard Spahr’s Private Client Services Group is here to navigate and advise on estate planning for individuals who may be affected by the proposed legislation. If you have questions about how the proposed changes will impact you and your estate planning, please reach out to your Ballard Spahr attorney as soon as possible. 

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.