Year-End Federal Estate Tax Law Changes On Hold

December 10, 2021

The highly anticipated changes to estate tax laws seem to be on hold as we close out 2021. On Nov. 15, 2021, President Biden signed the Infrastructure Investment and Jobs Act (IIJA) into law. The IIJA provides investment in the nation’s infrastructure as follows: rebuild roads and bridges; improve rails; access to clean water; access to highspeed internet; upgrade airports and ports; create national network of electric vehicle charges; achieve a zero emissions future; and make our infrastructure resilient to the impacts of climate change, cyber attacks and extreme weather. It was highly anticipated that revenue from changes in the estate tax laws would help pay for these improvements.

However, while the IIJA does generate some revenue from revisions affecting employers, the proposed changes to the estate and gift tax laws were surprisingly not included in the Act. Such sweeping changes which did not occur but are still not off the table for changes in the near future include:

Estate Tax and Gift Tax Exemption

Reducing the federal gift and estate tax exemption from the current $10 million (indexed for inflation to $11.7 million for 2021) to $5 million (indexed for inflation to about $6.2 million). Currently, the existing $10 million exemption reverts back to the $5 million exemption amount on Jan. 1, 2026.

Grantor Trusts

Proposals to make dramatic changes to curtail the use of grantor trusts as an estate planning technique did not happen. Grantor trusts allow transferring assets out of a grantor’s estate for estate tax purposes, while having the grantor remain the owner for income tax purposes. This has allowed a grantor to pay income tax attributable to the assets transferred without these payments being considered gifts and preserve the trust corpus for the beneficiaries. Proposed changes would have required the assets in a grantor trust to be included in the grantor’s estate as of the grantor’s date of death. Also, any sale between a grantor and grantor trust would be subject to income tax. Distributions from a grantor trust to a beneficiary would be treated as a taxable gift under proposed changes. Finally, if the grantor relinquished the grantor trust power during his or her lifetime, commuting the trust to a nongrantor trust, the proposed legislation would treat the action as an additional gift of the assets of the trust to the trust beneficiaries, valued as of the date the grantor makes the change. Although this proposed legislation was not included in the IIJA, the enactment may still take effect sometime in the future. Additionally, there is a possibility that such changes could be made effective retroactively. The proposed changes would have affected popular grantor trust planning strategies and may still in the future, including: Spousal Lifetime Access Trusts (SLATs); Irrevocable life Insurance Trusts (ILITs); Grantor Retained Annuity Trusts (GRATs); and Qualified Personal Residence Trusts (QPRTs).

Valuation Rules for Nonbusiness Assets

The IIJA proposed eliminating the use of valuation discounts when valuing nonbusiness assets transferred as fractional or minority status shares to entities such as a family limited partnership or family limited liability company.

Additional Proposed Changes

The IIJA also did not include any provisions to change the federal estate tax rate, which remains at 40%, and also did not eliminate the step-up in basis at death.

Estate Plan Next Steps

What does all this mean for your estate plan today? If you are working on creating and funding your trust, complete your gift. The Build Back Better bill (BBB) is not signed yet and could possibly include some estate tax law changes. Regardless, the federal estate tax exemption amount is still set to drop on Jan. 1, 2026 from $11 million to $5 million (adjusted for inflation).

Congress could also make changes to the estate tax laws in the interim. If you are in the middle of creating and funding your trust, complete your gift (with the caveat that you may want to hold off fully funding an ILIT because such funding would use up the lifetime exemption instead of annual exclusion gifts). You might also consider making additional gifts in the next few years if you haven’t already maximized your exemption amount or to use up the annual increases to the lifetime exemption amount currently at $11,700,000.

Pay close attention to Washington politics as we get closer to 2026 for potential changes in the law.

For more information or discuss further, please contact Susan Friedman at slf@kjk.com or 216.736.7272.