PREVIEW

The $ 3.5 trillion “Build Back Better” reconciliation spending program is making its way through the US Congress. On September 13, 2021, the US House Ways and Means Committee released its set of proposed revenue streams to fund the program. The proposal would dramatically increase the extent to which family wealth would be subject to income, inheritance and gift taxes but, in many ways, is not as harsh as US President Joe Biden had proposed. The summary below describes the parts of the proposal that are most likely to affect individual taxpayers. It is too early to predict which parts of the proposal will actually be implemented, but it is useful to know what possibilities are being seriously considered.

IN DEPTH

EXCLUSION AND EXEMPTION AMOUNTS

Proposed change: The current amount of the inheritance and gift tax exclusion will be halved from its current level ($ 11.7 million) and will be reduced to $ 5 million per person, indexed to the Inflation (estimated at $ 6.02 million in 2022), effective for deaths and donations made after 2021. The tax exemption on generational leap transfers will also be reduced in the same way.

Recommendation: People with remaining exclusion amounts should consider using them before the end of the year.

LICENSOR TRUSTS

Proposed changes: Assignor trusts created after the enactment of the law — and contributions to pre-existing grantor trusts made after the enactment of the law — would be included in the gross estate of their grantors. Distributions from trusts subject to this new regime to anyone other than their settlor and the settlor’s spouse would be treated as taxable donations. If the settlor ceases to be treated as the owner of any part of the trust during the settlor’s lifetime, the assets attributable to that part will be considered to be transferred by gift. In each case, appropriate adjustments would be made to reflect any prior taxable donation made to the trusts. This new rule does not apply to trusts that would be included in the gross estate of the deemed owner of the trust in the absence of the new rule.

In addition, sales between a trust and the person who is deemed to be the owner of the trust (whether or not the deemed owner is the transferor of the trust) would be treated as sales to third parties (except that losses would be rejected). unless the trust is fully revocable by the deemed owner. This provision does not apply to trusts created and funded before the enactment of the law.

Recommendation: People who can act quickly might consider creating new transferor trusts or making additional donations to existing transferor trusts before the promulgation date. Timely additions can be especially important for those planning to fund premiums for life insurance policies held in trust with future donations. The beneficiary trust should offer the possibility of quickly eliminating the status of transferor trust in the event that the effective date of the legislation predates the financing of the trust.

EVALUATION RULES

Proposed modification: After promulgation, donors and other transferors will no longer be permitted to use traditional valuation discounts when valuing an interest in an entity that holds non-business assets (passive assets not used in the active conduct of a trade or business) for the tax on gifts or inheritance purposes.

Recommendation: All contemplated interest donations in entities that would no longer be eligible for discounts under the proposal should be completed prior to enactment. Consideration should be given to using a formula based on the value of the donated property for donation tax purposes in order to limit the size of donations in order to minimize the tax consequences of not meeting the effective date of the donation. the new provision.

INDIVIDUAL RETIREMENT ACCOUNTS (IRAS)

Proposed changes: Taxpayers with adjusted gross income greater than $ 400,000 ($ 450,000 for a joint filing) would not be allowed to perform Roth conversions from 2032. In addition, the proposal includes a general ban on Roth conversion of amounts. held in qualified pension plans, except to the extent that the conversion is taxable from 2022.

Taxpayers with adjusted gross incomes greater than $ 400,000 ($ 450,000 for a joint filing) would be prohibited from making contributions to retirement accounts (other than SEP and SIMPLE IRA) when the total value of all accounts Defined Contribution and IRA (including legacy accounts) is $ 10 million or greater. These taxpayers would also be required to receive mandatory distributions of 50% of excess over $ 10 million held in retirement accounts (other than Roth accounts) and mandatory distributions of all excess over $. of $ 20 million held in Roth accounts.

IRAs would not be allowed to hold certain investments, such as private placement investments and investments in entities in which the account holder has a substantial interest, directly or constructively. In the case of a non-public company, “substantial” means holding 10% or more of the voting rights or value of a company. Nor could IRAs hold an interest in a company in which the owner of the IRA is an officer or director. IRAs holding such investments would have until early 2024 to distribute or dispose of such interest in order to avoid disqualification of the entire IRA.

INCOME TAX

Proposed changes. As of December 31, 2021, the top marginal tax rate, with the top bracket starting at $ 400,000 for individuals and $ 450,000 for married couples, would be increased to 39.6%. There would be an additional 3% surtax on modified adjusted gross income greater than $ 5 million ($ 2.5 million for a married person filing separately; $ 100,000 for estates and trusts).

The maximum long-term capital gains rate would be increased from 20% to 25% for taxpayers in the highest ordinary tax bracket, with effect for sales after September 13, 2021, unless the seller has a firm contract concluded before this date and the sale takes place before the end of the year. Taking into account the 3.8% tax on net investment income and the proposed 3% surtax, next year’s tax on long-term capital gains and ordinary income could reach 31.8%. Capital gains exclusion rates for Qualified Small Business Shares (QSBS) would be limited to a 50% exclusion (versus 75% and 100%) for those earning more than $ 400,000.