2021 was an interesting year for estate planning professionals and high-net-worth individuals and families. After a year of speculation and legislative uncertainty, congress was unable to pass the Build Back Better Act.
On September 15, 2021, the House Ways and Means Committee released legislative text detailing their proposed tax increases as part of President Biden's Build Back Better Framework.
On September 27, 2021, the legislative text proposed by the House Ways and Means Committee was advanced in a bill sponsored by Rep. John Yarmuth, D-KY, and introduced to the House Rules Committee as the Build Back Better Act (H.R. 5376).
The original bill included tax increases for high-income individuals and families, and sought to eliminate many of the key estate planning techniques utilized to reduce wealth transfer taxes.
Some of the more relevant proposals in original bill, included: (1) reduction of the basic exclusion amount for federal gift, estate, and generation-skipping transfer tax purposes from $11,700,000 to $5,000,000, indexed for inflation; (2) different tax treatment for grantor trusts that would have limited them as an estate planning vehicle; and (3) disallowance of the use of entity-level valuation discounts for nonbusiness assets held in family-owned entities.
Fortunately, the original bill was modified to eliminate the various sections relating to the items described above. The most recent legislative text of the Build Back Better Act (H.R. 5376) is found in the Rules Committee Print 117-18 released by the House Rules Committee on November 3, 2021, and subsequently amended by Rules Committee Print 117-19 on November 4, 2021.
Although the items mentioned above have been eliminated and are not included in the most recent legislative text found in Rules Committee Print 117-18, the updated text still includes language that would impose surcharges on high-income individuals, estates, and trusts.
Under the updated text of Rules Committee Print 117-18, a five (5%) percent surcharge would be imposed on the "modified adjusted gross income" of a taxpayer that exceeds $5 million (married filing separately), $200,000 (estate or non-grantor trust), and $10 million in all other cases. Additionally, a three (3%) percent surcharge would be imposed on the “modified adjusted gross income" of a taxpayer that exceeds $12.5 million (married filing separately), $500,000 (estate or non-grantor trust), and $25 million in all other cases.
The future of the Build Back Better Act remains uncertain, and it is difficult to predict whether the bill will be revisited by Senator Joe Manchin and his Senate colleagues. It is very possible that some version of the Build Back Better Act could be adopted by the House of Representatives and the Senate without any significant changes to wealth transfer tax laws. Despite all the uncertainty, the September proposal and original bill should provide individuals and families with an increased awareness of the congressional Democrats' playbook to target high-income individuals and families.
For calendar year 2022, the basic exclusion amount for federal gift, estate, and generation-skipping transfer tax purposes is $12,060,00 per person ($24,120,000 collectively for couples). The basic exclusion amount will be adjusted upward for inflation in future years, but under current law it is scheduled to "sunset" and be reduced by fifty percent (50%) on January 1, 2026. The Treasury Department has confirmed that taxpayers taking advantage of the increased basic exclusion amount in effect from 2018 to 2025 will not be adversely impacted after 2025 when the basic exclusion amount is scheduled to drop to pre-2018 levels. In other words, if the taxpayer uses the "extra" basic exclusion amount before it expires (by making lifetime gifts), it will not be "clawed back” to cause additional tax if the taxpayer dies after the basic exclusion amount is reduced in 2026. Therefore, it is a "use it or lose it" type of benefit, and the taxpayer who makes use of the additional basic exclusion amount prior to 2026 will lock in the benefit of the extra basic exclusion amount.
As a result of the current legislative uncertainty and future “sunsetting" of the increased basic exclusion amount, high-networth individuals and families should consider utilizing currently available estate planning techniques, such as making gifts or sales to grantor trusts, to maximize their applicable federal gift, estate, and generation-skipping transfer tax exemptions.