Reduction of Gift, Estate and Generation-Skipping Tax (GST) Exemption
The House proposal will reduce the estate and gift tax exemption back to $5 million, adjusted for inflation. This change will also reduce the GST tax exemption to the same level. The estate and gift tax exemption as well as the GST tax exemption would be $6,020,000 in 2022. “Portability” of the unused federal gift and estate tax exemption (where a deceased spouse’s remaining federal exemption can be transferred to the surviving spouse) would still be available.
Effective date: for gifts made and decedents dying after December 31, 2021.
Grantor Trust Inclusion for Estate Tax Purposes
A new Internal Revenue Code section would make includable in a decedent’s taxable estate any portion of a grantor trust of which the decedent is deemed the owner for income tax purposes.
Additionally, it treats a distribution made from a grantor trust as a gift, unless (a) the distribution is made to the grantor’s spouse, or (b) the distribution discharges an obligation of the grantor.
Effective date: trusts created on or after the date of enactment (or to any portion of a trust that was created before the date of enactment which is attributable to a contribution made on or after the date of enactment).
Comment: This section generally discourages establishing irrevocable grantor trusts (also known as Intentionally Defective Grantor Trusts (IDGTs)) because the trust would be includable in the grantor’s estate.
The IDGT has become one of the most commonly used trusts, as it permits the grantor to 1) transfer assets out of their estate, 2) pay the taxes on trust income (which is not treated as an additional gift to the trust) and 3) allows the trust assets to grow unencumbered by income tax.
This proposal, if enacted, would also likely negate potential benefits of Spousal Lifetime Access Trusts (SLATs), Grantor Retained Annuity Trusts (GRATs), Qualified Personal Resident Trusts (QPRTs) and Irrevocable Life Insurance Trusts (ILIT) created after the date of enactment.
Taxpayers who are considering setting up any type of grantor trust (other than a revocable trust) should consider the proposed changes and how they could affect trusts established and/or funded after the proposed effective date.
Change to Rules Regarding Sales Between Grantor Trust and Deemed Owner
A new section would require the recognition of gain on sales between a grantor trust and its deemed owner. Any losses generated by the sale or exchange of assets between a grantor trust and its deemed owner would be disallowed under the new section. Under current law, no gain or loss is recognized on the sale.
The rule specifically will not apply to a grantor’s revocable living trust.
Effective date: sales to grantor trusts created on or after the date of enactment (or to any portion of a grantor trust that was created before the date of enactment which is attributable to a contribution made on or after the date of enactment).
Comment: This provision may eliminate the benefit of a sale to an IDGT created after the date of enactment because any gains will be recognized on the sale.
Valuation Discount Limitations
The proposal would eliminate valuation discounts otherwise applicable to most transfers of non-business assets held in an entity.
Effective date: transfers after the date of enactment.
Comment: This rule effectively eliminates discounts for entities other than their assets used in an active business. So, individuals who create limited partnerships and LLCs to which they contribute only stocks and bonds will no longer be able to apply a discount when they then gift an interest in that entity to family members.
Income Tax Provisions Affecting Estates and Trusts
Surcharge on High Income Estates and Trusts
A new section provides that estates or trusts with income over $100,000 shall pay an additional 3% tax on their “modified adjusted gross income.” Wholly charitable trusts are not subject to these rules.
Effective date: tax years beginning January 1, 2022.
Sale of Qualified Small Business Stock by Trusts/Estates Limited
A new provision will limit the up to $10,000,000 gain exclusion a trust or estate can take on the sale of qualified small business stock at 50% of the applicable exclusion.
Effective date: sales after September 13, 2021, excluding sales under contracts binding on September 12, 2021.
What May Individuals Want to Do Now, Before a Bill Passes?
We strongly encourage individuals to work with their advisors as soon as possible to review their planning and perhaps take advantage of the current rules before they change.
Individuals may wish to consider creating SLATs, undertaking sales to grantor trusts (using valuation discounts), and using their gift (i.e., unified credit) and GST tax exemptions before they lose them. For individuals who have already exhausted their gift tax exemption, but not their GST tax exemption, they may wish to consider the benefits of making a gift equal to the balance of their GST tax exemption and pay gift tax on the gift. If the donor lives for three years from the date of the gift, the gift tax paid will be removed from the estate.
If the new gift and estate tax exemptions have an effective date of January 1, 2022, and the other changes in the law are effective on the date of enactment, it will likely make sense to seize on the favorable exemptions and laws that are still available. It is important to note that current proposals are not yet law, and that many obstacles remain before approval. However, proactive planning may be worthwhile in light of current legislative activity.
This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.
Neuberger Berman Trust Company (“NBTC”) utilizes the Neuberger Berman investment platform of equity, fixed income and alternative products and strategies as its primary investment option. Non-Neuberger Berman products and strategies are also available on a limited basis and generally as a complement to Neuberger Berman offerings. NBTC’s preference for Neuberger Berman products and strategies may result in incremental benefits to NBTC, its affiliates and their respective employees.
CIO outsourcing, tax planning, and trust and estate administration services offered by Neuberger Berman Trust Company. “Neuberger Berman Trust Company” is a trade name used by Neuberger Berman Trust Company N.A. and Neuberger Berman Trust Company of Delaware N.A., which are affiliates of Neuberger Berman Group LLC. Affiliated investment products and services are available through the various investment advisers that are subsidiaries of Neuberger Berman Group LLC.
Neuberger Berman Investment Advisers LLC is a registered investment adviser. The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.