On September 13, 2021, the U.S. House of Representatives Ways and Means Committee released a draft of its new tax legislation. It includes, among other matters, proposed changes that would directly affect federal estate tax and many of the gifting vehicles upon which we have come to rely. Here are some highlights of changes that may affect your estate planning along with some actions you may want to consider immediately.

1. Federal Estate and Gift Tax Exclusion. The current federal estate and gift tax exclusion amount is $11.7M per person. This exclusion was scheduled to return to $5M (indexed for inflation) on January 1, 2026. The proposed legislation would accelerate the reduction for estates of decedents dying and gifts made after December 31, 2021, effectively cutting the exclusion amount in half ($6,030,000 in 2022).

 Consider making gifts before the end of 2021 to utilize the current $11.7M exclusion amount.

2. Grantor Trusts. Generally, when the grantor of a grantor trust dies, the assets in the trust are not included in the grantor’s federally taxable estate. In addition, payment by the grantor of income tax on the trust income during his or her lifetime, was not considered a further gift to the trust or to the trust beneficiaries. Until now, the exception has been for revocable (grantor) trusts which are included and taxed as part of the grantor’s federally taxable estate. The proposal would include in the grantor’s taxable estate the fair market value of assets held in any and all grantor trusts as of the grantor’s date of death and the payment of income tax on the trust assets by the grantor would be considered an additional gift to the trust. In addition, distributions from the trust during the grantor’s lifetime to anyone other than grantor or the grantor’s spouse (assuming the spouse is a US citizen) would be considered a completed (taxable) gift. Further, the proposal would treat the termination of the grantor trust status during the life of the grantor as a completed gift. The proposal would apply to trusts created on or after the date the law is enacted or to contributions made to an existing trust on or after that date.

Consider terminating grantor trust status now or making a gift to a Grantor Retained Annuity Trust (GRAT) or spousal lifetime access trust (SLAT) instead of a grantor trust.

3. Valuation Discounts. Currently, valuation discounts, such as discounts for lack of marketability and minority interests, are allowed for transfers of non-business assets for estate and gift tax purposes. The proposal would eliminate the valuation discounts for non-business assets. Non-business assets are defined as passive assets that are held for the production or collection of income and are not used in the active conduct of a trade or business. The proposal would apply to transfers after the date of the enactment of the legislation.

 Consider making gifts that are currently eligible for valuation discounts.

Fortunately, the committee’s proposal notably omits, when compared to the President’s proposals, a provision that would eliminate the stepped-up basis for inherited assets.

These are just the current proposed legislative changes. It is unclear if the proposed changes will be enacted as presented or if the legislation will be further modified. No one has a crystal ball.  But, you should be aware that Congress is actively looking to make changes to the federal estate and gift tax laws.

If you have been contemplating doing some advanced estate planning to take advantage of the current estate and gift tax laws, your window of opportunity may be closing. If you have any questions about these or any other estate planning matters, please contact Stephanie Pahides Kalogredis at Lamb McErlane PC.

Stephanie concentrates her practice in estate planning and estate & trust administration and wealth transfer and succession planning. She assists her clients in finding personalized solutions to meet their estate planning goals through the use of wills, trusts, gifting and legal agreements and when the time comes, helps settle estate and administer trusts. skalogredis@lambmcerlane.com. 610-701-4433.