House Ways and Means Committee Proposals – II

Take-Away: Both good news, a clarification, and bad news with regard to effective dates, should the Ways and Means Committee proposals become law as part of the upcoming budget reconciliation process.

Good News First: In the first summary, I noted that the effective date for the reduction in the estate and gift tax applicable exemption amount was January 1, 2021, i.e., a retroactive reduction. Wrong! That mistake was just corrected.

* The effective date for the reduction of an individual’s applicable exemption amount from $11.7 million to the proposed $5.0 million would be January 1, 2022. There would be no retroactive reduction in an individual’s applicable exemption amount.

Tip: Those individuals who have been considering making large taxable gifts to consume their currently available ‘large’ federal gift tax exemption ($11.7 million) have until the end of this calendar year in which to make the gift and use their ‘large’ exemption to avoid federal gift taxation, if Congress adopts the decrease in an individual’s applicable exemption amount.

Bad News Next: The proposed effective date for the Committee’s proposed changes to (i) Grantor Trusts and (ii) the modification/elimination of valuation discounts for estate and gift taxation of intra-family transfers, e.g. passive assets held in family limited partnerships and family limited liability companies, is the date of enactment, should these proposals become law.

Tip: If an individual has created a grantor trust, now would be a good time to transfer other assets to the grantor trust prior to the proposed legislation passing. Similarly, if a sale of an appreciated asset to an existing grantor trust has been considered in the past, as part of an estate ‘freeze’ strategy, now would be a good time to accelerate that gift/sale to the intentionally defective grantor trust, if Congress adopts the proposed changes to how a grantor trust is taxed.

Tip: If an individual is considering the use of a family limited liability company or limited liability company to transfer wealth to family members or to trusts for those family members, now is the time to make those gifts before the donors are denied the use of valuation discounts due to the lack of control or lack of marketability of those family-controlled entities to shelter the transfer from federal gift taxes, if Congress adopts the proposed changes that eliminate valuation discounts in lifetime gifts.