As the end of 2021 approaches and schedules start to fill with holiday plans, tax planning should be moved to the top of the list. Congress recently proposed the Build Back Better Act (BBB) that includes sweeping changes to the estate and gift tax rules that could affect you. While we cannot predict which of these changes will be enacted and when they will become effective, there are some actions you should take now to prepare. Please read our short summary of some of the proposed changes and reach out to a Buckley Fine attorney to review your personal estate and gift tax plan.

Estate and Gift Tax Planning: Currently, the federal gift and estate tax exemption is $11.7 million per person and is scheduled to decrease to $5 million (indexed for inflation) in 2026. However, the BBB proposes implementing that reduction even sooner, on January 1, 2022. You should review your gifting and consider making a large gift now to utilize the full $11.7 million exemption.

Irrevocable grantor trusts that many use to make large gifts, typically ILITs, SLATs, and GRATs, may no longer be viable options to hold gifted assets after the BBB passes. The BBB includes provisions that would include future contributions to those types of trusts (even those established prior to the BBB) in the donor’s taxable estate at death. This is particularly important for those that gift to ILITs so the ILITs can pay life insurance premiums on the policies it owns. If the trust receives a “contribution” after the BBB is enacted, a portion or possibly all of the life insurance proceeds may be included in the grantor’s taxable estate! If you have gifted to an irrevocable grantor trust, consider immediately funding the trust with enough assets to fully sustain any life insurance policies or other assets that the trust may own.

Individual Income Taxes: Under the BBB, the top marginal individual income tax rate would increase to 39.6% for married individuals filing jointly earning more than $450,000, heads of household earning more than $425,000, and unmarried individuals earning more than $400,000. This would also apply to estates and trusts earning over $12,500.

Corporate Income Taxes: The flat corporate income tax rate of 21% would be replaced with a graduated rate structure of 18% on the first $400,000 of income, 21% on income up to $5 million, and 26.5% on income thereafter, with the graduated rate phasing out for corporations making more than $10 million.

Capital Gains: The capital gains rate would be increased from 20% to 25% for sales after September 12, 2021, unless the seller had a binding contract before then and the sale occurs by year-end.

Tax Surcharge on Individuals, Trusts and Estates: The BBB would impose a tax equal to 3% of a taxpayer’s modified adjusted gross income over $5 million for a married couple ($2.5 million for a married individual filing separately) and estates and trusts with greater than $100,000 (excluding charitable trusts).

The BBB proposes sweeping changes that go beyond those listed above, some that may apply upon enactment and some on January 1, 2022. Reach out to a Buckley Fine attorney soon to discuss your situation and determine how these changes may affect you.