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Proposed Federal Estate Planning Changes: Trusts, Taxation, And Planning For Your Future

This week the House Ways and Means Committee (“the Committee”) released drafted legislation to increase certain taxes beginning in 2022. The increased taxation is meant to raise revenue to support some of the estimated $3.5 trillion which the federal government seeks to spend as part of a domestic investment plan. While the President has promised not to raise taxes on anyone earning less than $400,000 per year, these proposed changes extend beyond just income tax, altering the estate and gift tax schemes as well. Below we’ve summarized the most significant estate planning proposals, what they could mean for you, and next steps you can take to protect your assets.  As a caveat, however, it must be stated that these are proposals.  The final legislation will be the product of negotiations in Congress.

Proposed Estate Planning

Estate & Gift Tax Exemptions

The 2017 Tax Cuts and Jobs Act (TCJA) overhauled federal taxation in many ways. Notably, estate and gift tax exemptions were increased to $11.7 million for individuals and $23.4 million for married couples. Those provisions are already scheduled to sunset after 2025 per the TCJA itself. Thus, even if the current proposed tax changes are not enacted, estate and gift tax exemption limits will return to about $6 million for individuals and about $12 million for married couples come the year 2025.

The current House proposal aims to speed up this exemption decrease by changing the effective date from 2025 to 2022. The estate and gift tax exemption would also be lowered to $5 million per individual. This means that individual estates and gifts above $5 million would be exposed to a 40% federal estate tax for any portion of the estate which exceeds $5 million. The current 40% tax rate is historically low; it is possible that the tax rate could end up being higher in the final legislation.

Trust Implications

Many couples and individuals utilize trusts as vehicles to move assets and protect their estates from the burdensome and costly probate process upon their death. The House’s proposal takes aim at a specific kind of trust, known as grantor trusts.  These kinds of trusts allow individuals and families to transfer assets out of their estate for estate tax purposes but be considered the “owner” of the trust for income tax purposes.  This is a very powerful wealth preservation technique that enables the use of trusts such as the “intentionally defective grantor trust” or grantor retained annuity trust. If implemented, the new legislation will pull assets in these grantor trusts back into the taxable estate of the trust creator, rendering these techniques ineffective.

Sales of assets to or from a grantor trust by the trust’s owner would also be taxed under the new legislation. This new provision will treat these sales as equivalent to sales between the owner and a third party.

Both of these provisions will apply only to trusts and transfers created after the legislation goes into effect.

Asset Discounting

Currently, families planning to minimize their estate tax exposure can take valuation discounts on assets by placing the assets inside an entity, such as an LLC, and then dividing the assets between trusts or heirs as they wish. This allows the individuals to, for example, transfer a $10 million asset out of their estate while only using up, say, $6 million of their lifetime gift tax exclusion.

Under the new legislation, discounts for nonbusiness passive assets would also be disallowed. The drafted legislation defines nonbusiness assets as “passive assets that are held for the production of income and not used in the active conduct of a trade or business.” However, assets used in or owned by active businesses (i.e., “active” assets) can still be discounted under the proposed legislation. This is in an effort to alleviate concerns regarding the assets of family businesses and farms. Again, these provisions apply only to transfers made after the date of enactment of this legislation.

Inheritance Taxation

Originally, President Biden aimed to tax inheritances more like a true sale, requiring heirs to pay taxes on the death of the person from whom they inherit property. But the President did seek to include an exemption for gains of this nature under $1 million for single filers and $2.5 million for married couples, which many say would shield a large percentage of Americans from this form of inheritance taxation. However, the House Ways and Means committee did not include the President’s proposals in their draft tax plan. While a possible inheritance tax is not completely off the table, the House has indicated that it is not currently a top priority.

Step Up In basis

The current proposal is also silent as to any changes in step-up in basis. Stepped-up tax basis eliminates or reduces capital gains tax on  inherited assets and has been in the firing line since tax reform proposals first surfaced While the President still seeks to eliminate the step-up in basis, he faces pushback from much of Congress. As an alternative way to raise revenue, the proposal does include an increase in the capital gains tax rate from 20% to 25%. This could be an indication that eliminating stepped-up basis may be a continued threat in the future.

Proposed IRA Contribution Limitations & Distribution Requirements

Currently individuals can make contributions to IRA accounts regardless of how much they already have saved in those accounts. The Committee’s current proposal includes limitations on further contributions for individuals whose Roth or traditional IRA accounts exceed certain values.

Additional contributions would be prohibited in a taxable year if the total value of the IRA and defined contribution retirement accounts exceeds $10 million at the end of the prior taxable year. This limitation would only apply to the following people: single filers or those married filing separately whose taxable income is greater than $400,000; married filing jointly with taxable income greater than $450,000; and heads of households with taxable income greater than $425,000.

The proposal also includes an increase in minimum required distributions from large-balance retirement accounts for certain individuals with higher income. If an individual’s taxable income exceeds the same thresholds discussed above (e.g., single filers with taxable income greater than $400,000) and if their combined IRA, Roth IRA, and defined contribution retirement account balances exceeds $10 million at the end of a taxable year, they would be required to take a minimum distribution in the following year. The minimum distribution is generally 50% of any amount in said accounts which exceeds the $10 million limit. Thus, if an individual’s combined retirement accounts total $11 million, for example, they would be required to take a minimum distribution of $500,000 the following taxable year (or, in other words, 50% of $1 million).

These proposals regarding IRAs would become effective in taxable years beginning after December 31, 2021.

Next Steps In Estate Planning

While the Committee’s plan may seem burdensome, clients still have time to effectively plan for future changes in tax law. The new rules for grantor trusts, discussed above, will only apply to future trusts or transfers occurring after the legislation is enacted (and if the legislation is enacted). This means that any existing trusts are safe and people who used these estate planning techniques to transfer their wealth may remain unaffected.

The House will still debate this proposed legislation this week and into the future, and the final drafted legislation might look different from the proposition as currently written. However, it is clear that changes to the estate and gift taxation scheme are likely imminent in some form.

Regardless of what tax changes are enacted in 2022, your family may wish to consider beginning estate and wealth planning processes. If you put off doing so during the pandemic, or haven’t even thought about estate planning yet, it’s not too late to start the process. If your family may be within the scope of the proposed new tax laws, please call or book a complimentary evaluation appointment through our website to discuss your planning options for securing your family’s future.


House Ways and Means Committee summary of proposals:




Bloomberg Law:


About Daniel Weiner

Daniel Weiner is a US and UK licensed attorney, based in San Diego, who provides trust administration and estate planning services to families and individuals across California. Dan guides his clients through the often confusing maze of financial and legal decisions to create plans that ensure the well-being of their families and the accomplishment of cherished family goals.


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