The Obama administration tried to limit the use of valuation discounts through proposed regulations in 2016, but faced backlash from Republican lawmakers and trade groups representing family farms and businesses. The rules were later withdrawn by the Trump administration.
The Ways and Means plan isn’t all bad news for estate planners and their clients. The new rules for grantor trusts would only apply to future trusts or transfers occurring after the change is enacted. So, assets in existing trusts would be safe, and billionaires and millionaires who have already used trusts and other techniques to pass on the bulk of their fortunes to heirs may be largely unaffected.
The legislation also doesn’t address dynasty trusts, vehicles—which some Democrats have proposed to limit — that can be used to pass wealth from generation to generation without having to pay estate, gift, or generation-skipping transfer taxes.
The House Democrats’ plan would provide a window for rich Americans to take advantage of the higher lifetime exemption between now and the end of the year. “Most clients have already used this exemption,” said Beth Shapiro Kaufman, a member in Caplin & Drysdale’s Washington, D.C., office. But anyone who’s been procrastinating will have a few months to carry out planning strategies.
The plan also currently excludes Biden’s proposal to impose capital gains taxes on appreciated assets held by millionaires and billionaires at death, ending a benefit known as “step-up in basis.”
The nonpartisan Joint Committee on Taxation estimated Tuesday that the Ways and Means proposal would hike the average tax rate on Americans earning $1 million or more to 37.3% in 2023, up from 30.2% under present law, bringing in an extra $96.5 billion from that elite group.
The House, however, could still amend its legislation and the proposal hasn’t been discarded yet in the Senate, which is actively working on its own bill. The Senate Finance Committee’s top Democrat, Ron Wyden, in a statement released by his office Monday indicated the step up in basis change is still very much in play.
Some groups, like the Family Business Coalition, are already ramping up efforts to lobby against the changes proposed in the Ways and Means package. The group’s chairman, Palmer Schoening, said in an email Monday that the changes to valuation discounts and grantors trusts would be “akin to a stealth death tax increase for many family businesses.”
He urged other coalition partners to contact lawmakers in the House and Senate to oppose the Ways and Means’ proposal.
Others praised the plan as a step toward a fairer tax system.
“Both the income tax and the estate and gift taxes have been allowed to fall into disrepair, such that it is easy for wealthy taxpayers to almost completely escape both of these forms of taxation,” Indiana University law professor David Gamage said. “These reforms would bolster the estate tax to improve its effectiveness at actually reaching very wealthy taxpayers.”
This article was provided by Bloomberg News.