Orloff Lowenbach Stifelman & Siegel P.A.

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Proposed tax law changes

 Proposed Tax Legislation

We have frequently told clients not to take action on proposed tax law changes because the final legislation is often significantly different from what we read in the newspapers. There is an old saying that there are two things you do not want to see made -- sausages and federal tax legislation.  At the end of the day all sorts of compromises are made, and new provisions suddenly appear.

However, some new proposals seem likely to be adopted, and their probable effective dates require us to be ready to take quick action so we need to be prepared.

The most significant changes that may affect our clients are:

1.  Gift, Estate, and GST Tax Changes:

The 2021 exemption (for federal gift, estate, and GST tax) is $11.7 million; the exemption is scheduled to increase to approximately $12.0 million in 2022; and then it is scheduled to be reduced by 50% in 2026.

The new proposal would accelerate the reduction in the exemption to approximately $6.0 million on January 1, 2022.

To utilize all or any part of the extra $6.0 million exemption that will disappear, in most cases you must give away more than the base $6.0 million, and you must do that this year if the reduction takes effect in 2022.

2.  Grantor Trust Rules:

Many of our clients utilize irrevocable grantor trusts in their planning.  These trusts include:

 GRATs (grantor retained annuity trusts)
 SLATs (spousal lifetime access trusts)
 ILITs (irrevocable life insurance trusts)
 IDGTs (intentionally defective grantor trusts)

Under a recent proposal (that would be effective as of the date of enactment) existing grantor trusts can retain their tax benefits, but new trusts and any additions to existing trusts will have very different and adverse income and estate tax consequences.

Since future contributions to ILITs are usually needed in order to provide funds for the payment of insurance premiums, it will be important to quickly deal with those ILITs.  For example, it may make sense before the new law is enacted to pre-fund the ILITs with sufficient cash to cover future premiums.

3.  Other Potential Changes Worth Noting:

Valuation discounts for non-business assets (i.e. marketable securities held in entities) would be eliminated.

Individual income tax rates would increase beginning in 2022.

Capital gains tax rates would increase effective September 14, 2021.

While there is no assurance that any of the proposed legislative changes will be enacted, we plan to contact many of our clients to discuss your individual situation and what can and should be done.  In the meantime, if you have any questions, please contact us.