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September 23, 2021

Stroock Client Alert

Completing gifting and other estate planning transactions before new legislation is enacted

Proposed legislation

On Wednesday, September 15, 2021 the House Ways & Means Committee advanced proposed legislation that would dramatically change the estate and gift tax landscape for future planning. Some of the proposals would go into effect as of the date of enactment (the date the President signs the law into effect) and it will be advantageous to implement certain planning prior to that date.The proposals that are particularly relevant for estate planning include the following:

1. Reduction of estate, gift and GST tax exemptions.  The proposed legislation would accelerate the reduction of the federal estate, gift and generation-skipping transfer tax exemptions from December 31, 2025 to December 31, 2021.  Accordingly, the exemptions would be cut back at the end of this year from $11,700,000 to approximately $6,020,000. 

2. Grantor trusts subject to estate tax.  The proposed legislation would treat all new grantor trusts as included in the grantor’s estate for estate tax purposes.  This would severely limit valuable planning techniques going forward.  Grantor trusts generally include, without limitation, trusts in which a spouse is a beneficiary (including spousal lifetime access trusts) and insurance trusts. 

The proposals would go into effect for grantor trusts created after the date of enactment and to grantor trusts to which assets are added after the date of enactment.  All existing grantor trusts are grandfathered under existing law but any contribution to a grantor trust after the date of enactment could subject all or a portion of the trust to estate tax.

To the extent that an individual has a life insurance trust and has been funding the life insurance with annual gifts to pay premiums, future contributions could cause all or a portion of the trust assets (including the life insurance proceeds) to be subject to estate tax, thereby defeating the primary purpose of the insurance trust. This result may or may not have been intended and there may be a lobbying effort to mitigate the impact of this provision. It is advisable to prefund an existing insurance trust to enable it to make premium payments for several years in order to avoid this result.  It may be possible for loans to be made to fund future premiums but that remains to be seen.

Even though no specific mention of grantor retained annuity trusts (GRATs) was made in the proposed legislation, if adopted in its current form, GRATs will no longer produce beneficial results.

3. Sales to grantor trusts subject to income tax.  The proposed legislation would treat sales to new grantor trusts as taxable events for income tax purposes as though the sale was with an unrelated third party.  The proposal would go into effect for grantor trusts created after the date of enactment and to grantor trusts to which assets are added after the date of enactment.

Although the proposal would suggest that future sales and possibly exchanges with existing grantor trusts will be able to continue without adverse income tax consequences, there is wide speculation that it may have been an oversight and additional limitations may be applicable.   

4. Elimination of valuation discounts.  The proposed legislation would eliminate valuation discounts for nonbusiness assets that produce passive income and are not used in an active trade or business.  This will largely depend upon how Congress defines “nonbusiness assets” in this context. The proposal would go into effect after the date of enactment.

Importantly, the bill does not eliminate the step-up in basis currently available upon death.

Time Sensitive Action Items

Gifts to existing spousal lifetime access trusts, insurance trusts and other forms of grantor trusts (such as intentionally defective dynasty trusts) or the creation of new trusts should be completed before enactment, which could be a matter of days.  Any gifting subsequent to the date of enactment that an individual wishes to complete to preserve balance of his or her exemption before it is reduced on December 31st could be made outright to the beneficiaries or to a non-grantor trust.

Of course, some of the proposals may be subject to significant negotiation and may be substantially modified.  To the extent individuals seek to take advantage of the opportunities available under current law, they should do so as soon as possible because the window may be closing quickly. 

You may find Stroock’s prior reporting on the anticipated legislation here. Please reach out to any members of the Stroock Private Client Services team for guidance on planning in light of these proposals.