TRUST & ESTATE PLANNING

New Tax Proposals: Actions to Consider Immediately and Before Year End

09.16.2021 - Bryan Kirk, Director of Estate and Financial Planning and Trust Counsel

New federal tax proposals are now making their way through Washington. While the proposals remain subject to change, they give us the latest indication on what is likely to become our new tax laws.

Estate Tax Increases Make Gifting a Top Priority

For many, the top action item remains making gifts to help mitigate estate taxes.

If you have not yet used your full estate and gift tax exemption and have significant assets you would like to gift, now’s the time.

Today, you can gift up to $11.7 million during your lifetime or at death without being subject to the 40% federal estate or gift tax. The new proposals would reduce this $11.7 million exemption amount to approximately $6 million beginning in 2022.

Keep in mind that you need to gift more than $6 million for this timing to matter. That’s because it’s only after you use the first half of your exemption that you start to use the additional exemption that the new proposals would take away.

For example, suppose you have not used any of your exemption and make a gift of $6 million this year. If the exemption drops to $6 million in 2022, you will be considered to have used all of that $6 million exemption and have no exemption left. You will not be considered to have used any of the $6 million of exemption that went away.

The new proposals allow you to still use your $11.7 million exemption any time before the end of 2021. However, it’s important to note that your timeframe to complete gifts may be much shorter if your plan involves an irrevocable grantor trust or gifts of interests in nonbusiness assets held in a limited liability company (LLC), partnership or other private entity. The new proposals cut off the tax benefits of these strategies as soon as the proposals are enacted, which could occur in only a handful of weeks.

Fund Grantor Trusts as Soon as Possible

Irrevocable grantor trusts allow you to gift assets and continue to be the owner of those assets for income tax purposes.

As a result, the trust you create can grow free of income tax while you personally pay the taxes, versus the trust being depleted by paying the tax. Grantor trusts also allow you to sell assets to the trust without having an income tax event, which is a powerful strategy for those with large estates.

Under the new proposals, these tax benefits would no longer be possible as soon as the new law is enacted. If you are considered the owner of a trust for income tax purposes, the trust would also be included in your estate for estate tax purposes. And any sales to a grantor trust would be subject to tax.

Existing grantor trusts would be allowed to retain their tax benefits. But any additions to those trusts would remain part of your estate for estate tax purposes. Since new rules could be enacted in the upcoming weeks, if you are considering a large addition to an existing grantor trust or funding a new grantor trust, you may want to complete your gift as soon as possible to avoid being entangled in the new rules.

A special note on Irrevocable Life Insurance Trusts (ILITs): Many people have created Irrevocable Life Insurance Trusts (ILITs) to hold their life insurance policies and make regular gifts to the trusts to pay the premiums. If you are in this situation, you should review the terms of your trust and future premium requirements. You may need to evaluate whether making a lump sum gift now to the trust makes sense to avoid the need for future transfers that may complicate the tax benefits of the trust under new rules.

Complete Gifts of Nonbusiness Assets in LLCs and LPs

Also drafted to disappear as soon as the new proposals become law are valuation discounts for nonbusiness assets held in limited liability companies (LLCs), partnerships and other private entities.

Currently, if you gift a minority or non-controlling interest in a private entity, the interest is valued at a lower price to account for the lack of control and marketability. For example, a 25% interest in an LLC holding $10 million typically would not be valued at $2.5 million. Instead, it would more likely be valued closer to $1.5 to $2 million to reflect that the interest is illiquid and non-controlling.

Under the new proposals, these discounts would go away if the LLC’s assets include publicly-traded securities, non-operating cash or other passive, non-business assets. Therefore, if you are making a gift of interests in an entity holding those types of assets, consider completing these transfers as soon as possible.

Individual Income Tax Rates to Increase for 2022
As expected, the draft rules also include increases in individual income tax rates that would be effective for 2022:

  • The top ordinary income tax rate would return to 39.6% and apply at a lower income threshold–$400,000 for single filers and $450,000 for joint filers.
  • The net investment income tax of 3.8% would apply to a broader group of taxpayers, specifically to trade or business income of single filers with income over $400,000 and joint filers with income over $500,000, as well as trusts and estates.
  • A new 3% surtax would apply to any individual income tax return with modified adjusted gross income (MAGI) over $5 million as well as trusts and estates with MAGI over $100,000.
If your income exceeds these thresholds, you may want to accelerate any ordinary income that has flexible timing into 2021. You should also consider the timing of any deductions, specifically charitable contributions.

If you can accelerate income into 2021, you may wish to increase charitable contributions in 2021 as well. Otherwise, it may benefit you to postpone your charitable contributions to 2022 when they will be more valuable to offset higher taxes.

Many were watching to see if the current limits on deducting state and local taxes would be included in the new proposals, but the current drafts do not reflect any change.

Capital Gains Tax Increases Would Be Retroactive to September 14, 2021

The top capital gains tax rate would go up from 20% to 25% for those in the top brackets (above $400,000 for single filers and $450,000 for joint filers).

These rates are for both long-term capital gains and qualified dividends. This change is less than the shift to 39.6% that was earlier proposed or even the shift to 28% that many expected. However, if you add the net investment income tax, the new 3% surtax and any state income tax, your total tax on a large capital gain could be over 40% if you live in a high-tax state like New York or California.

In addition, the new capital gain tax rates would be effective as of September 14, 2021, so there would be no opportunity to sell an asset now and benefit from the current rates. The exception is if you entered into a written binding contract by September 13, 2021. The proposals would allow you to proceed under the contract and be subject to the current rates.

Also effective as of September 14, 2021 would be a change to limit the capital gain exclusion for qualified small business stock. Currently, you can exclude up to 100% for your gain if your stock qualifies up to a maximum of $10 million. Under the new proposals, only 50% of your gain could be excluded.

The new proposals make no change to the “step-up” of basis at death. That rule, which allows your heirs to sell your assets without capital gain, remains in place.

Big Changes to Large Retirement Accounts

The new proposals would bring major changes to large retirement accounts as well as accounts with concentrated positions in company stock or private funds. Beginning for 2022, you would generally be required to withdraw 50% of any balance over $10 million and 100% of any balance over $20 million from your IRA and pay income tax on that amount.

You would also be required to undo investments that depend on you being a qualified investor, as is the case for many private investments. And a parallel restriction would apply to investments in any company where you own 50% or more of the interests–a threshold that drops to 10% if the company is not publicly traded.

As an example, suppose you had a $25 million IRA holding $5 million of publicly traded securities and a 40% interest in private fund worth $20 million. Under the House proposals, you would need to withdraw the $5 million balance over $20 million plus half of the remaining balance over $10 million, so a total of $10 million additional income for 2022.

In addition, you will need to figure out what to do about any remaining interest in the private fund still held in the IRA. The new proposals give you 2 years to figure that out, but given the illiquidity of private investments, you likely want to start thinking through your plans as the new proposals progress in Washington. In some cases, it may make sense to withdraw funds from your retirement account this year before income taxes increase.

If you were intending to leave your large retirement account to charity (and maybe even if you were not), now could be the time to complete a major charitable gift to offset some of the income you will be forced to recognize.

Taking Next Steps

We encourage you to speak with us about how the new proposals may affect you. There may be actions to take immediately or before year end to make the most of the current rules before they change.






This communication is intended solely to provide general information. The information and opinions may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.


IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.

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Bryan Kirk, Director of Estate and Financial Planning and Trust Counsel

Gerard F. Joyce, National Head of Trusts and Estates

Craig Richards, Head of Tax Services

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