Though President Biden’s Build Back Better bill has been postponed to next year with dimming hopes of passing, one proposal in the bill signals an intensifying interest in taxing more varieties of trusts. Strategies to counter the new possible taxation could be useful in dealing with future similar legislation.
“There’s a strong probability of at least some tax increases ahead, particularly for upper income taxpayers and large corporations,” said Julie Alcala, senior wealth strategist at BNY Mellon Wealth Management, Chicago.
Under the BBB proposal, owners of basic trusts with more than $200,000 in annual income from capital gains, dividends and interest would have paid a proposed annual 5% levy; trusts and estates with more than $500,000 in income would pay 8%.
Should the proposal survive, if a non-grantor trust has MAGI over $200,000, the amount above $200,000—but only that amount—would be subject to a 5% surcharge. The same applies for non-grantor trusts with MAGI exceeding $500,000 and the additional 3% surcharge.
“Only the ultra-wealthy with non-grantor irrevocable trusts for their benefit will be impacted,” said Lance Sherry, J.D., at Chicago-based Kovitz.
“Most clients are not aware that [the surcharges] would also apply to non-grantor trusts, and the MAGI thresholds for those trusts are much lower,” said Tim Laffey, head of tax policy and research at Rockefeller Capital Management, Philadelphia.
MAGI on the trust level is calculated after distributions to beneficiaries, including charitable beneficiaries, among other factors.
Not all trusts are in the crosshairs of what is still just a proposal. A grantor trust, for instance, is not subject to the surtaxes.
“A grantor trust is very attractive because the grantor pays the trust’s income tax. By doing so, the grantor effectively makes a tax-free gift to the trust, thereby permitting the trust to grow undepleted by income tax,” said Karen L. Goldberg, principal-in-charge in the Trusts and Estates Group at EisnerAmper in New York.
“In addition, these new surtaxes shouldn’t apply to middle class and moderately wealthy families who set up trusts for reasons other than mitigating estate and gift taxes,” she said.
Typically, a simple trust for middle class and moderately wealthy families tries to keep estates out of the lengthy probate process, provide for children with special needs, restrict a child’s access to inherited money or other purposes.