Tax Reform Update – Where Are We Now?
On Monday the House Ways and Means Committee released a discussion draft of what they are considering as part of the reconciliation package. Some of the highlights that affect estate planning are:
Reduction of the estate tax exemption from its present level of $11.7M per person back to the pre-2018 level beginning in 2022. This would be approximately $5.5M per person. This is a change that was scheduled to occur in 2026, so it accelerates the need for gifting this year.
Modifying the tax treatment of grantor trusts. This would provide for inclusion of assets by the trust in the grantor’s estate at death and treat sales between grantor trusts and the grantor as a recognized transaction between unrelated third parties. This would dramatically affect popular strategies like spousal lifetime access trusts (SLATs) or sales to intentionally defective grantor trusts (IDGTs or IDITs). Some have indicated this change will be effective as early as September 13, 2021, but certainly by the first of the year.
Modify the estate valuation rules to ignore partial ownership and lack of control discounts. This does not appear to affect discounting of true operating businesses but would affect entities that primarily hold assets like publicly traded stock.
A significant increase in the Section 2032A exemption from its current level of about $1.19M to as much as $11.7M. This would benefit farmers and ranchers who own land. Unfortunately, there are pretty stringent rules to qualify for this exemption. Among the Section 2032A requirements is that it only applies if qualified heirs are operating the farm or ranch and they have to continue do so for at least ten years.
Limit deductions for donations of conservation easements. This would be retroactive to December 2016.
While capital gains rates would increase as expected, though not by as much, one important item that is not in the discussion draft is the elimination of the stepped-up income tax basis on inherited assets. Previous proposals had included an elimination of the step up in tax basis at death as well as the realization of gain on gifts and at death. This is definitely a positive step for owners of farms and ranches and other family businesses.
This continues to be an evolving situation, and nothing is final. So, stay tuned. What is the most important take away? Get with your attorney and accountant right now as time will be of the essence.
This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.