On September 13, The Ways and Means Committee of the House of Representatives released sweeping tax proposals affecting both businesses and individuals. Some of these proposals would have a significant impact on estate tax planning strategies if enacted.
Proposed tax law changes in the draft legislation that could affect clients’ estate planning include:
Estate and Gift Tax Exemption Decreases
Changes to Treatment of Grantor Trusts
Grantor trusts – trusts whose taxable activity and income are reported on the income tax returns of the persons who created the trusts – have been a widely-used and popular planning technique for many years. The proposed legislation would significantly restrict their use in the future. Among the planning techniques that would be impacted are:
Grantor trusts would be subject to four specific changes:
These changes would apply to new grantor trusts created after the date of enactment (when the President signs any legislation passed by both houses of Congress). These changes also would apply to portions of trusts to which contributions are made after the date of enactment. Grantor trusts that are created and funded before the enactment date would remain subject to the current tax laws as long as no future contributions are made to the trusts.
Should this tax proposal be enacted, ILITs would become especially problematic. The premiums on life insurance policies held in ILITs are often funded through gifts to the ILIT that qualify for the annual exclusion from the gift tax. Making these contributions to the trust after the date of enactment of the proposed changes would cause at least partial inclusion of the insurance in the settlor’s estate, which would defeat the purpose of establishing the ILIT. Some commentators expect the life insurance industry to mount a vigorous campaign to exempt ILITs from these new rules. In the meantime, individuals who have ILITs that are funded with annual gifts to pay the policy premiums may wish to consult with us and their insurance agents to consider whether to pre-fund their ILITs and/or their life insurance policies held in ILITs.
Changes in Valuation Rules
The proposed legislation would affect valuation and:
What Is Not Included in This Proposed Legislation
Perhaps as noteworthy is what was not included:
Negotiations Are in Full Swing
As of our publication date, this legislation is still being debated and has not yet passed the full House of Representatives. Of course, even if this legislation is passed by the House, passage by the Senate will be necessary, and we can expect that senators will have their own proposals. As with any proposed legislation, we cannot predict what will be added, modified or deleted in regards to these proposals as they move through Congress.
Clients who have delayed making gifts or finalizing plans for new trusts may have only a short time (weeks or at most a few months) to finalize and implement their plans and should not delay action any further.
If you have questions about any of the proposals mentioned above, please contact your Warner estate planning attorney.
