Potential revisions of tax law in 2021: abstract and planning suggestions | Pillsbury Winthrop Shaw Pittman LLP

For the 99.5 percent law

On March 25, 2021, Senator Bernie Sanders published his proposed law to reform inheritance and gift taxes. The law, titled For the 99.5 Percent Act, targets a variety of popular estate planning tools while increasing the inheritance tax rate. While some of the proposed changes will take effect as soon as the bill, if adopted, goes into effect by the President, structures put in place by then or in other cases before 2022 appear to be recognized, not rejected. The reduction in the tax exemptions for inheritance and gift taxes will take effect at the beginning of 2022. A brief summary of the key provisions of Senator Sanders' bill reads as follows:

  • Reduction in inheritance tax exemption to $ 3,500,000 minus past reportable gifts (a sharp decrease from the current exemption of $ 11,700,000 per person in 2021);
  • Cap on gift tax exemption to $ 1,000,000 (currently at $ 11,700,000, minus any previous gifts in excess of the annual tax allowance, currently $ 15,000 per recipient);
  • Creation of progressive inheritance tax rates, including a peak rate of 65 percent for estates in excess of $ 1 billion (currently a flat rate of 40 percent);
  • Limitation of haircuts for the transfer of family business shares;
  • Treat grantor trusts as if they were owned by the grantor for inheritance tax purposes, not just income tax;
  • Require Grantor Retained Annuity Trusts (GRATs) to have a minimum term of 10 years and a minimum of 25 percent residual interest;
  • Do not provide for an increase in the death basis for assets held in certain grantor trusts;
  • Apply the generation skipping transfer tax (GST) to trusts with a term of more than 50 years; and
  • Limit the use of the current annual gift tax exemption of $ 15,000 per recipient.

Reasonable Taxation and Equity Promotion Act (STEP)

On March 29, 2021, Senator Chris Van Hollen unveiled his proposed tax legislation, the Sensible Taxation and Equity Promotion (STEP) Act. The law, if passed, would fundamentally change the income tax environment for estate planning. The proposed Van Hollen Act would go into effect retrospectively from January 1, 2021 when it comes into effect.

Below are some of the proposed provisions in the STEP Act:

  • Abolish the increase in the tax base of a testator's property on death (as proposed in the Green Paper as discussed below);
  • Triggering capital gains tax on unrealized appreciation of assets when transferred by gift and death (note, however, that transfers to a spouse or charity would not trigger capital gains tax under the STEP Act);
  • Taxation of the unrealized increase in the value of trust assets every 21 years; and
  • Limit exceptions and exclusions, including a lifetime exemption of $ 1,000,000 from capital gains tax on unrealized appreciation of assets transferred by gift and death (with an additional exclusion of $ 500,000 for personal residence and a more limited exemption for Material assets).

Green book

On May 28, 2021, the US Treasury Department published the "General Notes on Government Revenue Proposals for Fiscal Year 2022" (the so-called "Green Book"). The Green Paper is a detailed explanation of the Biden Government's proposed revenue, which is included in the budget for fiscal 2022. The items in the Green Paper and in Biden's budget do not matter, as Congress will ultimately decide which (if any) of the proposals will legislate. The budget passed by Congress is often a modified or revised version of the President's proposals negotiated between Republicans and Democrats in Congress.

However, the Green Paper can provide valuable insight for individuals and families looking for ways to plan ahead for possible tax law changes. Particular attention should be paid to the dates of entry into force of the proposals, as they can affect the planning options for the rest of the calendar year 2021. The following are some of the main points proposed in the Green Paper:

  • Increase in the upper marginal income tax rate from the current 37 percent to 39.6 percent;

– The maximum rate would apply to income over $ 452,700 for individual applicants and $ 509,300 for joint applicants;

– This proposal would be effective for the tax year beginning after December 31, 2021;

  • Increase in Long Term Capital Gains and Qualifying Dividend Rate on Adjusted Gross Income from over $ 1,000,000 to 39.6 percent;

– This proposal would be effective for profits that need to be recognized after the date of the announcement;

  • Eliminate the death cost base increase, with death benefit recognized as taxable income;

– The proposed prize recognition would apply to prizes greater than $ 1,000,000 per person;

– The proposal also requires recognition of unrealized profits that have been held in a trust or partnership for at least 90 years;

– Transfers to a U.S. spouse or charity would be excluded in addition to gains from tangible personal property, primary residence, and certain small business stock;

– This proposal would be effective on gains made on donated property and on property owned after December 31, 2021 upon the death of a deceased person, and on certain assets owned by trusts, partnerships and others on January 1 non-corporate entities. 2022;

  • Tax gain on a partner's interest in an investment in an investment services partnership (“carried interest”) in an investment company as ordinary income if the taxable income exceeds US $ 400,000;

– This proposal would be effective for the tax year beginning after December 31, 2021;

  • Eliminated IRC Section 1031 of Deferring Profit Acknowledgments for Exchanging Profits in excess of $ 500,000 for individual submitters and $ 1,000,000 in profit for joint applicants;

– This proposal would apply to exchanges completed in tax years starting after December 31, 2021;

In addition to the proposed changes to tax laws, the Green Paper includes the Biden administration's proposal to increase funding for the IRS's enforcement and compliance programs. The proposal increases IRS funding by $ 6.7 billion in discretionary funding and increases IRS funding to $ 72.5 billion in mandatory funding. Additionally, the Green Paper proposes increasing enforcement and compliance initiatives and investments by $ 417 million in 2022. Additional funds would be allocated to enforcement against individuals earning more than $ 400,000. These proposals suggest that the Biden government will seek to improve taxpayers' compliance and will push for greater resources in order to generate a net increase in tax revenues.

Summary and recommendations

While the above suggestions are worrying, the main point is that it is now time to review your planning. The current ability to give tax-free gifts and long-term GST-exempt trusts provides a valuable way to avoid the transfer tax on significant assets. While the legislative proposals may lead us to proceed with caution and take measures to protect against possible changes (some of which may be retroactive), recent developments suggest that the gift exemption and long-term GST exemption may not be reduced for remittances that occurs during the 2021. So now is an important time to get in touch with your Pillsbury team to discuss estate and tax planning updates that may be right for you. Finally, consider some of the following options this year, including your potential use of the gift and GST exemptions:

  • Complete the donation in 2021 to take advantage of available exemptions, specifically the Intergenerational Transfer (GST) tax exemption for donations to a long-term dynasty trust. In view of certain proposals to reduce the inheritance, gift and GST tax exemptions and taking into account the proposed deadlines, it may make sense to make gifts to those with exemptions before the end of 2021.
  • In connection with gifts in 2021, it may be beneficial to grant a fraction of the stake in the property (e.g. a stake in a GmbH or real estate), as the value can be reduced by certain discounts for gift tax purposes, e.g. Control and / or lack of marketability.
  • Another planning consideration is the use of a "savings clause" in a deed of gift. There are various forms of a savings clause that are intended to limit the amount of a gift, for example in the event of retroactive changes in tax law. Please note, however, that depending on their form and the particular circumstances of the individual case, savings clauses may be challenged by the IRS as being ineffective.
  • Consider disclaimer planning for gifts to trusts. For individuals and families who want to plan ahead for potential tax law changes but may be concerned that material changes will not be implemented in the short term, disclaimer planning can be useful in changing the plan without further adverse tax consequences. Please note that disclaimers must be carefully executed in order to meet the requirements of state law and federal tax laws.
  • For married couples, consider forming a living marriage union. Payments into the trust entitle the holder to unlimited marriage deduction for gift tax purposes, so reducing the gift tax allowance should not affect these gifts. Please note that the trust must be structured in such a way that it meets certain requirements and restrictions in order for the contribution to be eligible for the marriage deduction.
  • Consider a spouse lifetime access trust (SLAT) to take advantage of the current exemptions for high gift and GST fees while maintaining some access to the trust assets at the spouse level.
  • Given some of the above suggestions for recognition of profits in the event of death or after a certain period of time (90 years), providing cash or assets on a high cost basis may be beneficial to reduce the tax consequences of a profit recognition event.
  • For families who are charitable, consider charitable planning like nonprofit residual unitrusts and nonprofit lead annuity trusts.
  • For individuals and families who don't have significant inheritance and gift tax exemptions but want to reduce their overall estate, consider selling to a trust for a promissory note. Since the transaction is a sale, if properly structured it will not be treated as a taxable gift and the assets sold to the trust will be excluded from the estate of the donor / payer.
  • As mentioned above, some of the proposals are aimed at limiting the benefits of an IRC section 1031 like exchanges. For individuals and families who own real estate for investment purposes and are interested in a similar swap, 2021 could be the best time to do so. The effective date of legislative changes related to the like-for-like exchanges should be carefully monitored as some of the proposals require the exchange to be completed before the effective date.
  • Consider using one or more Qualified Small Business Stock (QSBS) trusts to benefit from significant federal income tax exemptions on capital gains.
  • The foregoing is for illustrative purposes. You should consult your legal advisor before undertaking any tax or estate planning to determine whether it is appropriate for your situation.