In particular, if the Tax Proposal is passed into law, it would:
- Reduce the estate and gift tax exclusion from $10,000,000 for individual, adjusted for inflation, to $5,000,000 per individual, adjusted for inflation. With inflationary adjustments, the exclusion would be reduced from $11,700,000 per individual this year, to an estimated $6,020,000 per individual after January 1, 2022.
- With respect to Grantor Trusts created after the effective date of the Tax Proposal, the legislation would: [a] treat such trusts as subject to estate tax on the grantor’s death; and [b] treat distributions from such trusts as taxable gifts.
Recall that “Grantor Trusts” are those types of trusts that can be designed to avoid estate tax, but which are subject to income taxation to the grantor (the person who created the trust). This is of significant benefit because payment of income tax for the trust works like a tax - free gift to the trust and helps control appreciation to the grantor’s wealth.
Note that the reduction in estate and gift tax exclusion (Item 1, above) is set to take effect under the Tax Proposal on January 1, 2022 (next year). The change to the Grantor Trust rules (Item 2, above) would be effective as of the passage of the Tax Proposal, which could be as soon as late October or early November, 2021.
If the above concerns you, or if you have questions, please reach out to us. There is still some time to consider creating new grantor trusts or funding existing trusts, and to consider making gifts to take advantage of the current exclusion amount