As of November, 2021, the proposed “Build Back Better” legislation does not contain any changes to the federal estate tax exemption provisions.
A Halloween Treat, Something to Be Thankful For & Early Christmas.
Without much fanfare or headlines, all our concerns about the looming drastic shift in the estate tax landscape disappeared at the end of October; a nice “treat” leading into Halloween weekend. This is certainly cause for celebration: there will be no lowering of the estate tax exemption in 2022! (as far as we know as of today).
The Estate Tax Exemption and Current “Build Back Better” Legislation
Headlines indicate President Biden will be signing the Infrastructure Investment and Jobs Act on Monday November 15, 2021. Don’t worry, that’s not the bill that would have changed tax laws.
The other piece of the puzzle, the social spending bill known as the Build Back Better Act Reconciliation Bill, has not yet been brought to a vote. But don’t worry; if passed, the current version of the legislation does not contain any increase in estate taxes (nor does it increase individual income or capital gains tax rates, or corporate income tax rates). It also does not change the step-up in basis at date of death structure that is currently in place, nor change 1031 exchanges or grantor trust rules. This is a welcome relief after all the proposals that have been swirling around during 2021.
Since Joe Biden’s election a year ago and the Georgia runoff in January, we all anticipated a big shift in our tax laws. After legislation was introduced that would have slashed the estate tax exemption to $3.5M, decoupled the gift tax exemption back to $1M, eliminated the step up in basis, imposed capital gains tax on the transfer of appreciated assets during lifetime or at death, eradicated 1031 exchanges, and done away with a lot of the neat Grantor Trust techniques we use as estate planners to reduce taxes, we started to panic. In the summer, we sent a letter to all our clients who would be affected, so they could contemplate how such proposals would impact their estate plans. We started to meet with clients, and proactively plan, which was infuriating without a crystal ball.
Then in September, after the House Ways and Means bill was introduced, we thought things might not be that bad, with the exemption proposed to shrink to around $6M instead of $3.5M, but there was still important planning to be done under a shadow of uncertainty during a shrinking window of opportunity for clients of a certain net worth. Then, quietly on Thursday October 28th, the House Democratic bill removed all of those provisions estate planners and their clients were worried about.
No Changes to the Current Gift and Estate Exemption Provisions Until 2025
The $11.7M per person gift and estate tax exemption will remain in place, and will be increased annually for inflation until it’s already scheduled to sunset at the end of 2025.
The exemption will increase with inflation to approximately $12,060,000 per person in 2022. In 2026, the exemption is predicted drop to about $6,600,000 per person when the current tax act sunsets. Of course, the Grinch might sneak in and reinsert these dreaded tax increasing provisions before year end, or before the end of 2025, so we’ll be keeping an eye out.
Now that the pressure is off, we can return our focus to finding the right balance for our clients’ estate and farm succession plans without letting taxes drive the process. Keep in mind that 2025 will be here before we know it, and it’s always good planning to take steps to have future appreciation happen outside the older generation’s taxable estate. Also keep in mind that if the Build Back Better Act is passed, there may be some income tax changes, which you should discuss with your tax advisor.