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William D KingHighlights the Impact of the Proposed Tax Laws on Gift and Estate Planning

William D King

Several changes to the Internal Revenue Code as proposed in the plan would directly influence gift, and estate tax planning believes William D King. The various proposals for taxes were released by the House Ways and Means Committee. Aim at raising money to pay for the spending planned by President Biden in the Build Back Better Act. Although the proposals are like to change before it becomes law. It is worth assessing the likely impact on the strategies of estate planning.

Take note of the lowering of exemption limit for estate and gift tax, advises William D King

The proposed law would drastically reduce the exemption limit for gifts. And estate tax from the existing $10 million equivalents to $11.7 million in 2021. After indexation to $5 million, which would effectively be $6.2 million on January 1, 2022. When the law will come into force. According to the current law, the reduction would happen over the next 5 years. As the target is to lower the exemption to $5 million by January 1, 2026.  The proposal makes it clear that the Biden administration has no time to wait for the reduction. As it targets to widen the tax net immediately for increasing the target of revenue collection to provide the finance for Biden’s social and climate spending plan says, William D King.

If the proposal remains unchanged, then by January 1, 2022. The exemption limit for gifts and the estate tax would come down to around $6 million. Therefore, individuals affected by the change would do good to use any remaining gift tax exemption before the New Year.

Grantor trust rules will change

The proposal will dramatically reduce the scope of using grantor trusts as an effective technique for estate planning. Grantor trusts are a highly effective technique in estate planning. That allows asset transfer from a grantor’s estate to meet the needs of estate taxes. But from the angle of income tax, the grantor remains the owner.   The asset transfer between the grantor and the grantor trust happens without any income tax ramifications. The grantor continues to pay income tax related to the transferred assets. Without considering them as additional gifts while preserving the corpus of the trust for the beneficiaries.

The projected legislation would mean including the worth of all assets held in a grantor trust. On the date of death of the grantor. Any sale transactions between the grantor and grantor tax would attract income tax. And all distribution to a beneficiary from a grantor trust except to the grantor and their spouse will be considered as a gift from the grantor to the recipient that attracts tax explains William D King.

In the event of the grantor deciding to turn off the grantor trust power before death. It would effectively convert the trust into a non-grantor trust. The new law would consider such action similar to additional gifting of the assets of the trust to the beneficiaries. For the purpose of valuation of the assets deemed as gifts. The value on the date of relinquishing the power will apply.

The proposed changes will only affect the trusts established on or after the date of enactment of the act.