The estate tax changes that were anticipated in the final months of 2021 are apparently not materializing, leaving some people scratching their heads as to what they should do next.
Two recent pieces of legislation – the Infrastructure Investment and Jobs Act (IIJA) and the Build Back Better (BBB) bill – were expected to include provisions changing the estate tax laws. The IIJA, which invests in the nation’s infrastructure by repairing roads and bridges, improving transportation, providing access to clean drinking water, and ensuring access to high-speed internet, was signed into law by President Biden on November 15, 2021. Many experts predicted the revenue needed to pay for these improvements would come from revamping the estate tax laws.
While the IIJA does generate some revenue through revisions that impact mostly employers, it does not contain the sweeping changes to the estate and gift tax laws that would have upended many estate plans. Notably, the IIJA does not contain:
· A reduction in the federal estate tax exemption amount which is currently $11,700,000. This was anticipated to drop to $5 million (adjusted for inflation) as of January 1, 2022.
· Any alterations to the use of irrevocable trusts as gifting vehicles including irrevocable life insurance trusts and grantor trusts. It was anticipated that these changes would be effective for trusts created on or after the enactment date of the legislation. Clients have been in a frenzy these past few months creating and funding trusts to avoid this potential cut-off date.
· The elimination of valuation discounts (such as lack of control or lack or marketability) for closely-held entities that hold nonbusiness assets such as cash, equity and certain types of real estate.
· Any modification to the federal estate tax rate. It remains at 40%.
· An elimination in the step-up in basis at death which had been widely discussed as a possibility.
The Build Back Better bill passed in the House of Representatives on November 19, 2021. The Senate will now decide whether it should be passed, revised or rejected. The BBB bill is largely seen as a social safety for Americans which will address childcare and affordable housing. It will also provide funds for fighting climate change and expanding health care coverage. The BBB bill does include some changes to income tax, such as an additional taxes for large corporations and high-income individuals (i.e., taxpayers with an adjusted gross income of more than $10 million). It also increases the state and local taxes (SALT) deductions from $10,000 to $80,000. However, it does not include an expansive remaking of the estate and gift tax laws that people were so concerned about.
What does this mean for your estate plan?
If you are in the midst of creating and funding your trust, go ahead and complete your gift. First, the BBB bill is not signed yet. It could potentially be signed in a different form where the proposed revisions are brought back in. Second, the federal estate tax exemption amount is still dropping on January 1, 2026 from $11 million to $5 million (adjusted for inflation). That is only four years away and Congress could still make changes to the estate tax laws in interim.
One caveat to proceeding with your year-end gifting relates to fully funding an irrevocable life insurance trust (ILIT). Many ILIT’s are funded on a yearly basis using annual exclusion gifts of $15,000 (note the annual exclusion will increase to $16,000 in 2022). Most of my clients who discussed fully funding an ILIT this year have decided to hold off on that for the time being. That is because fully funding an ILIT would use up your lifetime exemption instead of annual exclusion gifts.
If you have completed your gift, you are ahead of the game. You may want to consider additional gifts in the next few years if you have not maximized your exemption amount or to use up the annual increases for inflation to the lifetime exemption amount (currently $11,700,000).
Some people who were on the fence about large gifts will probably hold off on any gifting until next year and revisit the discussion in 2022. For estate planners, this frenetic pace that we have seen over the past two years may continue as clients monitor Washington politics while we inch closer to 2026.