Considering tax reduction planning? Take action now

If you have a net worth in excess of $12 million or have been considering tax reduction planning, please call your estate planning attorney as soon as possible. The opportunity to take advantage of the estate and gift tax exemptions at current levels and the benefits of grantor trust planning may disappear soon. Here is what you need to know.

On September 13, the House Ways and Means Committee released the tax proposals that are part of the budget reconciliation bill. They are continuing to work on the bill, adding expenditures and tax changes. There are numerous tax increases that will affect businesses, large and small. Our focus is on the personal tax provisions that affect individuals and estate and trust planning and administration.

• Rate Increases for high income earners:
  • Individual: Top bracket increases to 39.6% for tax years beginning after 2021.
  • Capital Gains rate increases to 25% from 20% as to capital transactions after September 13, 2021.
• Reduction of Estate, Gift and Generation Skipping Transfer Tax exemptions to pre-2017 tax act level, i.e., $5 million with inflation adjustments. The exemptions are currently $11.7 million so they would be reduced to $5.85 million plus the inflation adjustment for this year. This would likely put the exemptions in the range of $6,030,000 depending on the inflation rate applied).
• Changes to the Grantor Trust rules will impede the creation and funding of Grantor Retained Annuity Trusts, Qualified Personal Residence Trusts, Charitable Lead Annuity Trusts, and other irrevocable trusts designed to be grantor trusts. This change would be effective as to new trusts and transfers on or after the date of enactment.  Transfers to existing grantor trusts or creation and funding of new grantor trusts will capture both transfer tax and income tax benefits if completed before the enactment date.  
• Changes to Retirement Plans and IRAs:
  • Self-dealing rules for IRA investments would be tightened and private placement investments by IRAs would be prohibited.  A two-year transition period would apply to IRAs already holding such investments. 
  • “Back-door” Roth conversions would be prohibited.
  • Additional IRA contributions would be barred if the high income earner had aggregate value in IRAs and defined contribution plans exceeding $10 million.
  • Additional required minimum distributions for high income earners of 50% of excess over $10 million of aggregate value of IRAs, Roth IRAs and defined contribution plans.
  • If the aggregate balances are in excess of $20,000,000, Roth IRA or designated Roth accounts of high income earners must be distributed completely, or enough to bring the aggregate to $20 million, then the 50% distribution would apply for the remaining excess over $10 million. 
  • Effective for tax years beginning after December 31, 2021.

For purposes of the above, high income earners are defined as: 

    Married Joint                  $450,000
    Head of Household        $425,000
    Married Separate           $225,000
    Unmarried                      $400,000
    Trusts and Estates         $12,500

High income earners would be prohibited from Roth conversions starting after December 31, 2031. There are also other surtaxes and rate adjustments that are directed to higher income levels.

What are the prospects for these changes surviving the legislative process? Many moderate Democrats do not favor the level of spending at $3.5 trillion. Senator Joe Manchin has indicated support for $1.5 trillion of additional spending, and some moderate Democrats in the House may feel exposed to constituents’ objections to the spending and the increased taxes. Further changes may be proposed in the House, or when the Senate takes up the proposed legislation, so it is not clear whether some or all of these proposals will be enacted, but we think it is likely that some of these proposals will be enacted (and some effective) in the next few to several weeks.  

Stay tuned for new developments.