We interrupt our regularly scheduled program on Family Legacy Planning to alert you to pending tax law developments.

The US House of Representatives has revealed a series of tax increases it is proposing in order to pay for President Biden’s $3.5 trillion Build Back Better spending plan. Democrats are working on a compromise that could get the approval of all Democratic legislators. If such a bill passes the House and Senate, it goes to President Biden for signature and could soon be enacted into law. There is much focus on certain provisions of this proposal (such as increases in the ordinary income tax rate and capital gains tax rate), but there are other provisions that get less attention. Some of those provisions would have a dramatic impact on estate planning, and it’s those provisions we want to highlight for you.

In a nutshell, for some time now, we have been warning that the “Golden Age of Estate Planning” may soon end. If these provisions are part of the new tax law, it will mark an end to many tools we’ve been using for the last 3 decades. These provisions are drafted to take effect on the “date of enactment” (presumably, the date President Biden signs the new law). The legislation grandfathers planning that was done with these tools before the “date of enactment.” There is a potentially closing window of time to wrap up planning and get in under the wire. If this law passes, then after the date of enactment, it will be too late.

Specifically, the new law would target tools we often describe as “squeeze & freeze” planning. The “squeeze” step involves transfer of assets to an entity like a Family Limited Partnership (FLP) and obtaining an appraisal of the FLP units that is discounted for lack of control and lack of marketability. The “freeze” step involves transfer of assets (such as the FLP units and other assets) to Grantor Trusts so that future appreciation is removed from the estate. Popular Grantor Trusts that would be impacted are Spousal Lifetime Access Trusts (SLATs), 678 Trusts (also called Beneficiary Defective Trusts or BDTs), Intentionally Defective Grantor Trusts (IDGTs), Grantor Retained Annuity Trusts (GRATs), and Irrevocable Life Insurance Trusts (ILITs). Assets funded into these trusts before the date of enactment would be grandfathered, but any transfers after that date cause estate tax problems.

In addition, the current $11.7 million lifetime estate and gift tax exemption would cut in half on January 1, 2022. To lock in the benefit of the current exemption, assets need to be transferred out of the estate this year. As pointed out above, if the transfer is to a Grantor Trust, the funding would need to be completed before the date of enactment.

We were also concerned that stepped-up basis could be under attack, but the current legislative proposal preserves step-up at death. Accordingly, we are still advocating tools to help generate a basis step-up, such as “upstream planning” (transferring assets to an elderly relative and then receiving them back with a stepped-up basis after the loved one dies). Special planning is required to avoid losing the step-up if the assets come back to you within one year.

If legislation passes in the coming weeks, there is still a narrow window of opportunity to create and fund a Grantor Trust and benefit from the current rules. Stay tuned for further developments on the new tax law.

Marvin E. Blum