Tax reform is coming: what it could mean for you | McDermott Will & Emery

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The $ 3.5 trillion “Build Back Better” reconciliation program is currently working its way through the US Congress. On September 13, 2021, the US House of Representatives Committee on Means and Ways published a series of proposed revenue increases intended to fund the program. The proposal would significantly increase the levels of income, inheritance and gift taxes on family wealth, but in many ways is not as strict as proposed by US President Joe Biden. The following summary describes the parts of the proposal that are most likely to affect each taxpayer. It is too early to predict which parts of the proposal will actually be implemented, but it is useful to know which options are being seriously considered.

EXCLUSION AND EXEMPTION AMOUNTS

Proposed change: Current Inheritance and Gift Tax Exclusion Amount will be halved from its current level ($ 11.7 million) and reduced to $ 5 million per person, inflation-indexed (estimated at $ 6.02 million in 2022) , effective for the death of the deceased and gifts after 2021. In the same way, the exemption from the generation-skipping transfer tax is also reduced.

recommendation: Individuals with remaining exclusion amounts should consider using them before the end of the year.

WARRANTY CONFIDENCE

Proposed changes: Grantor trusts created after the law came into effect – and contributions to pre-existing grantor trusts made after the law came into effect – would be included in the gross assets of their grantors. Distributions made by trusts subject to this new regime to persons other than their donor and the donor’s spouse would be treated as taxable donations. If the donor is no longer treated as the owner of any part of a trust during the life of the donor, the assets attributable to that part are treated as transferred by gift. In any event, reasonable adjustments would be made to reflect any previous taxable gifts to the trusts. This new rule does not apply to trusts which, without the new rule, could be included in the gross assets of the trust fund deemed the owner of the trust.

In addition, sales between a trust and the person believed to be the owner of the trust (whether or not the presumed owner is the trust giver) would be treated as sales to a third party (except that losses would not be recognized). unless the trust is completely revocable by the considered owner. This provision does not apply to trusts that were formed and funded prior to the entry into force of the Act.

recommendation: People who can act quickly might consider either starting new Grantor Trusts or giving additional gifts to existing Grantor Trusts before they go into effect. Timely supplements can be especially important for those planning to use future gifts to fund fiduciary life insurance premiums. The recipient trust should provide the ability to immediately revoke the grantor trust status if the legislation comes into force before the trust is funded.

EVALUATION RULES

Proposed change: After the entry into force, donors and other transferors will no longer be permitted to use gift or inheritance tax in the valuation of an interest in a company that uses non-business assets (passive assets that are not used in the pursuit of a trade or business operation) purposes to use traditional haircuts.

recommendation: All proposed donations of equity interests to companies that are no longer eligible for discounts under the proposal should be completed before they take effect. Consideration should be given to using a gift tax formula based on the value of the gifted asset to limit the size of the gifts in order to minimize the tax consequences of missing the new provision.

INDIVIDUAL RETIREMENT ACCOUNTS (IRAS)

Proposed changes: Taxpayers with adjusted gross income in excess of $ 400,000 ($ 450,000 if married together) would be prohibited from making Roth conversions from 2032. In addition, the proposal provides for a general ban on the Roth conversion of amounts that are held in qualified pension plans, unless the conversion is taxable from 2022.

Taxpayers with an adjusted gross income greater than $ 400,000 ($ 450,000 if married) would be prohibited from contributing to retirement accounts (other than SEP and SIMPLE IRAs) if the total value of all defined contribution accounts and IRAs (including inherited accounts) $ 10 million or greater. These taxpayers would also have to pay mandatory distributions of 50% of the surplus of over 10 million.

IRAs would be prevented from holding certain investments, such as private placements and investments in companies in which the account holder has material stakes, either directly or constructively. In the case of an unlisted company, “material” means an interest of 10% or more of the voting rights or value of a company. IRAs could also not have an interest in a company in which the IRA owner is an officer or director. IRAs holding such investments would have until early 2024 to distribute or dispose of such holdings in order to avoid disqualifying the entire IRA.

INCOME TAX

Proposed changes. Effective December 31, 2021, the top tax rate, which starts at $ 400,000 for individuals and $ 450,000 for couples, will be increased to 39.6%. A 3% surcharge would be added to modified adjusted gross earnings over $ 5 million ($ 2.5 million for separate registration of a married individual; $ 100,000 for estates and trusts).

The maximum rate for long-term capital gains would apply to taxpayers in the highest ordinary income tax bracket with effect on sales after the 13th and sales by the end of the year. Taking into account the 3.8% tax on net investment income and the proposed 3% surcharge, the tax on long-term capital gains and ordinary income could be up to 31.8% for the next year. Capital Gain Exclusion Rates for Qualifying Small Business Stocks (QSBS) would be capped at 50% (75% and 100%) exclusion rates for those earning more than $ 400,000.

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