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Proposed Changes to Gift and Estate Tax Provisions

By Alan K. Davis on September 15, 2021
On September 13, 2021, the House Ways and Means Committee issued a series of proposals for consideration for the payment of the Biden Administration’s desired $3.5 Trillion infrastructure Bill. The final legislation will likely look very different than the proposals as issued on Monday. Nevertheless, they are instructive as to the way things may develop over the next few months.

In particular, focusing on the gift and estate tax provisions, the proposal contains:
  1. Reduction of Gift and Estate Tax Exemption. The proposal calls for a reversion of the gift and estate tax exemption to 2017 levels ($5,000,000 per person (Indexed for Inflation). The effective date for this provision would be applicable to transfers after December 31, 2021.
  2. Disallowance of Valuation Discounts for Nonbusiness Assets. The proposal calls for the denial of valuation discounts (typically lack of control and lack of marketability) for all “nonbusiness assets”. Nonbusiness assets are defined as passive assets that are held for the production of income and not used in the active conduct of a trade or business. This provision is stated to become effective for transfers after the date of enactment of the Act. If unchanged, this provision could become effective well before the end of the year.
  3. Changes to Rules for Grantor Trusts. This provision calls for all Grantor Trusts to be included in the gross estate of the deemed owner (typically the grantor). Additionally, sales between grantor trusts and their deemed owner would be treated as sales between the owner and a third party. These changes would apply only to future trusts and future transfers, presumably after the date of enactment.
  4. Increase to Reduction in Value of Certain Farm and Other Business Real Estate. This proposal increases from $750,000 to $11,700,000 the amount that certain real estate used in farming or a family business may be reduced based on its actual use versus the fair market value. This provision would be applicable to decedent’s dying after December 31, 2021.
Given these proposals, clients should be diligent in (1) exploring transfers designed to utilize the larger exemption and valuation discounts for closely held entities that contain passive assets, and (2) finalizing pending transfers that take advantage of exemptions, discounts, and grantor trusts before the proposals are finalized and become effective.

For questions regarding this blog post or any other estate planning matter, please feel free to contact Alan Davis at (214)744-3700 or adavis@meadowscollier.com.