Q: I have seen many articles on the proposed tax legislation in Congress and the need for people to make gifts or engage in estate planning before the end of the year. How do I know if this impacts me?
A: You are correct that due to the ever-changing tax proposals in Congress, there has been much recent commentary. On September 13, the House Ways and Means Committee proposed a number of tax changes, including reducing the gift and estate tax exemptions from $10 million (indexed for inflation) to $5 million (indexed for inflation) effective as of January 1, 2022. In addition, the proposed legislation provided that intentionally defective Grantor Trusts would be included in the trust creator’s estate. This proposed change meant that Grantor Trusts (a popular advanced planning and gifting technique) would have no gift or estate tax benefit. Given these and other proposals, many people were working at an accelerated pace to create and fund Grantor Trusts prior to the enactment date of the proposed legislation.
However, on October 28, President Biden announced that a “deal” had been made so that the proposed legislation could move forward. Currently, the Build Back Better Act does not include the reduction in the gift and estate tax exemptions or the estate taxation of Grantor Trusts. Therefore, some of the immediate concern has been abated. A version of the Build Back Better Act was passed by the House of Representatives on November 19, but the Senate has not yet released its version. Since the legislative process allows for further amendments, there is still a possibility that certain proposals could be reintroduced, but, for now, there are no imminent changes to the gift and estate tax landscape.
A brief reminder: Current federal law provides that an individual can transfer $11.7 million of assets free of estate and gift tax. Assets in excess of that amount are subject to a 40% federal gift/estate tax. If Congress does nothing else, this exemption amount will sunset at the end of 2025 and automatically reduce to $5 million (indexed for inflation). Therefore, even though the Build Back Better Act does not accelerate the reduction, if you are concerned that you may have a taxable estate under the lower exclusion amount, you might consider making gifts sooner rather than later. This analysis is specific to each person and should be undertaken with your estate planning goals and needs in mind.
Know the Law is a bi-weekly column sponsored by McLane Middleton. Questions and ideas for future columns should be emailed to knowthelaw@mclane.com. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.