While it appears that the House of Representatives will not pass President Biden’s signature piece of legislation, the Build Back Better Act (BBBA) in its present state, the bill could still pass in another form. Most recently a leading Senator announced he will not support the bill as written right now. However, the House Speaker feels optimistic about its future prospects and believes Congress could come to an agreement early in 2022.
If you’ve paid even slight attention to the news over the recent months, you’ve probably heard about this legislation and the various ways it may impact your day-to-day life. However, one area that has received little attention is the Build Back Better Act’s potential impact on estate planning. Estate planning can be complicated to understand, and the new law could make things even more so. But don’t worry, an experienced estate planning attorney can help.
It is never too early to make sure your estate plan is in order. And with potential new legislation impacting estate planning rules and regulations, it is vital to understand what may be coming and how to prepare. The Build Back Better Act may not have become law just yet, and maybe it never will, but you don’t want to be scrambling to figure out your estate plan after it does.
Lower Gift and Estate Tax Exemption Thresholds
As it is currently written, the Build Back Better Act proposes to reduce the federal estate and gift tax exemption by more than half. Now, you can gift 11.7 million per individual to a tax-exempt estate trust without having to pay a gift tax. However, under the BBBA, this threshold would be reduced to 5 million per individual.
For example, in 2021, if you choose to gift 11.7 million to a tax-exempt estate trust to take care of your spouse and children, you will not have to pay a gift tax. If the BBBA passes, you will have to pay a gift tax on any amount over 5 million. Fortunately, as the bill stands right now, this only applies to gifts made on or after January 1, 2022, and does not retroactively apply to gifts made in 2021.
Grantor Trust Changes
The BBBA will significantly impact grantor trusts. Currently, a grantor trust permits the person providing funds for the trust (the grantor) to receive income tax benefits.
Grantor trusts allow the grantor to personally pay all income tax on the income that the trust gains. This allows more assets to remain in the trust and grow without being diminished by income taxes. Additionally, under current law, the grantor can remove assets from the grantor’s trust and replace them with assets of equal value.
Under the BBBA, grantor trusts might not provide the same income tax benefits as they do under current law. Sales between an individual and their own grantor trust would be taxable as income, although they currently are not treated that way. Fortunately, the BBBA proposes to make this rule effective only for trusts that are created after the act is signed into law.
Valuation of Non-Business Assets
For tax purposes, nonbusiness assets are used for the production of income; they are not used for the active conducting of a trade or business. In estate planning, when valuing these assets for gifts and estate tax purposes, it’s common to take advantage of discounts if the assets being transferred are not publicly traded or hard to value.
Under the BBBA, however, discounting the valuation of nonbusiness assets would no longer be permitted. This could significantly impact your estate planning, especially if you plan to transfer an interest in a family partnership or LLC. Like the other proposed changes to estate planning, this change would only apply to transfers made after legislators sign the Act into law. Therefore, if you’re considering making a discounted gift of a nonbusiness asset, you should consider doing so very soon.
You Are Valued And Heard Today, and For the Rest of Your Life at the Law Offices of Sherri M. Stinson P.A., Florida Estate Planning Firm
If you are currently behind schedule on your estate planning, you should consider acting quickly. The BBBA could have a significant impact on how you choose to provide for your spouse and children in the future. Failing to implement a well-thought-out and detailed estate plan can result in strangers making decisions on behalf of you and your family. And with the proposed changes in the law via the BBBA, now is the time to consider making any gifts or transfers soon.
However, there is no need to panic. At the Law Offices of Sherri M. Stinson, P.A., we want you to know that you are valued and heard today and for the rest of your life. We sweat the small stuff, so you don’t have to, and we can help you with every step of your estate planning process. Let us give you peace of mind with estate planning, simplified. Give us a call at (727) 361-9302 or complete our online form to book a consultation.
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The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information in this post should be construed as legal advice from the individual author or the law firm, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting based on any information included in or accessible through this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.