First Volley – House Ways & Means Committee Unveils Tax Plan

In our efforts to keep you up to date, here’s a synopsis of President Biden’s tax proposal that arises from the House Ways and Means Committee. The bill is not law until passed by the Senate and House and signed by the President. There will likely be changes through negotiations. Here’s our summary:

Gift and Estate Tax Provisions

Estate and Gift Exemption Decrease. Currently the gift and estate tax exemption is $11.7 million per taxpayer. The bill would reduce it to approximately $6,020,000 effective December 31, 2021.

If You Own a Farm – you have a special exemption to reduce its value, rather than being taxed at highest and best use. The farm provisions are the only pro-taxpayer provisions in this legislation.

Taking Away Estate Planning Tools – Many of you know that the Sheppard Law Firm uses advanced estate planning strategies, including SLAT (Spousal Lifetime Access Trusts), IDGT (Intentionally Defective Grantor Trusts), and sale to IDGT, GRAT (Grantor Retained Annuity Trust) and QPRT (Qualified Personal Residence Trust) to name a few.

All of these strategies involve retaining grantor trust status for income tax purposes yet enabling a transfer for gift tax purposes, excluding assets from the grantor’s estate.

While it’s unclear whether the GRAT and QPRT would be eliminated under the law as they are both sanctioned by the Internal Revenue Code, IDGT and SLAT strategies would be eliminated. There are other issues with QSST (Qualified Subchapter S Trusts). The date of enactment of the law would be the date where these strategies are eliminated.

Insurance Trust Rules Change – Irrevocable Life Insurance Trusts (ILIT) would no longer be able to use trust income to pay premiums without including the insurance proceeds in the grantor’s estate for estate tax purposes.

Sales to IDGTs – Another tool in our arsenal to minimize gift and estate taxes is to create a sale between the grantor and an IDGT. Under the current law, no capital gain is recognized. This legislation would force recognition of capital gain.

Valuation Rules – You may know that when transferring interests in businesses, real estate and even investments the current law provides for a discount when those interests are held in a company, partnership or LLC. The discounts relate to the fact that the closely held business interests aren’t marketable, are usually a minority interest and lack voting control.

Passive business interests and other non-business assets would no longer receive these discounts on valuation. The only exception are active business interests where the taxpayer is an active participant.

Income Tax Provisions – Estates and Trust with income over $100,000 pay an additional three percent (3%) surtax on their modified adjusted gross income.

Keep in mind that irrevocable trusts that don’t pass through their income currently are taxed at the highest federal marginal rate to the extent that the income is equal to or exceeds $13,050. Individuals don’t pay the highest marginal rate until they have $523,000 of taxable income. This 3% surcharge on AGI over $100,000 adds to the disadvantage of accumulating income.

Capital Gains – The long-term capital gain tax rate would increase from 20% to 25%, effective immediately, for married couples filing jointly with taxable income of more than $450,000, individuals with taxable income of more than $400,000, and trusts and estates with taxable income of more than $12,500. Including the new 25% rate, the new 3% surcharge, and the current 3.8% surtax on net investment income, the highest marginal long-term capital gain tax rate would rise to 31.8% under the House proposal.

Qualified Small Business Stock Exclusion – New provision cap gains that would otherwise not be taxable at fifty percent (50%).


Step up in basis – Congress did not include a provision that would eliminate the step-up in tax cost basis at death.

No deemed sale at death – which would have triggered capital gains.
No added limitations on GRATs – so short term GRATs appear to remain feasible.

No elimination of dynasty planning – to the extent that taxpayers have enough exemption left to engage in planning that eliminates estate taxes at each generational level.

No increase in gift/ state tax rates – while many strategies are threatened, the actual tax rate will remain the same.

No estate tax surcharges for billionaires – Good news for Jeff Bezos and Bill Gates.

What should clients do now, before a bill passes?

Clients should focus on creating SLATs, undertake sales to grantor trusts using valuation discounts, use their exemptions before they use them. For clients who have already exhausted their gift tax exemption but not their GST tax exemption, it may make sense to gift equal to the balance of their GST tax exemption and pay tax on the gift. If the donor lives for three years from the date of the gift, the gift tax paid will be removed from the estate.

We’ll keep you posted with further developments.

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