Proposed Impact of the American Families Plan Tax Proposal
How Will Trusts and Estate Planning Change under the Proposed American Families Plan?
By: Jennifer L. Holowach
Fein Such Kahn & Shepard, P.C.
The Biden Administration’s “American Families Plan” seeks to enact significant tax law changes, leaving many feeling uncertain about how these sweeping changes will impact their current estate plan.
In April 2021, the Biden Administration announced the “American Families Plan,” which is set to increase taxes on individuals and corporations in the United States. In September, the House Ways and Means Committee provided draft legislation language for these tax changes, giving us a clearer picture of what lies ahead. Taxpayers should also be aware that the proposed “American Families Plan” will bring an enormous overhaul to Gift, Trust, and Estate Planning. These changes will be troublesome, as they will uproot many traditional estate planning techniques.
While this legislation is set to take effect after December 31, 2021, many of its changes are proposed to be effective as soon as the plan is enacted within the coming weeks. Therefore, swift action is imperative for your estate plan. If you want to take advantage of the current federal estate tax exemption and planning techniques like Grantor Trusts that are likely to disappear under the proposed plan, now is the time to act.
The “American Families Plan” accelerates the rollback of the 2017 Tax Cuts and Jobs Act, a federal gift and estate tax exemption that now sits at $11.7 Million per person. This provision is currently set to rollback to $5 Million by the end of 2025, but if the “American Families Plan” proposal is put into law, for gifts made and decedents dying after December 31, 2021, the inflation-adjusted exemption will be closer to $6 Million per person. FSKS strongly advises our clients who have not taken full advantage of the $11.7 Million exemption to contact us to discuss how you can make use of this opportunity before it’s gone.
An additional concern is the elimination of one of the cornerstones of estate planning—the Intentionally Defective Grantor Trust. This popular tool is currently used by many to pass assets that have exceeded the federal tax exemption amount to an individual’s heirs while shielding those assets from estate tax. Grantor Trusts are used to move assets into a Trust where they will grow tax-free outside of the Grantor’s estate. It’s important to note that despite the shift in assets, the Grantor may still pay taxes on any income, dividends, and interest generated in the Trust to further provide a gift to heirs tax-free.
Assets held within a Grantor Trust established after the enactment date will be included in a decedent’s taxable estate where the decedent is deemed to be the owner of the Trust. Grantor Trusts established prior to the enactment will be grandfathered and exempt from the new proposal, but gifts made to those Trusts after the enactment date will also be included in the decedent’s taxable estate. Irrevocable Life Insurance Trusts that are not fully funded prior to enactment may be negatively affected by these changes.
Careful planning is necessary to take advantage of opportunities before they disappear.
Further, the “American Families Plan” will drastically overhaul the Grantor Trust rules with potential elimination of valuable estate planning strategies, including:
- Qualified Personal Residence Trusts
- Life Insurance Trusts
- Spousal Lifetime Access Trusts
- Sales to Defective Grantor Trusts
- Grantor Retained Annuity Trusts
- Qualified Subchapter S Trusts
Other important changes contained in the “American Families Plan” include transfers of non-business assets, which will no longer be afforded a valuation discount, and Trust or Estate income in excess of $100,000, which will now be subject to a tax surcharge of 3%.
Before these proposed sweeping changes take effect, our clients should contact us to utilize the above-named gift and estate planning techniques before they are gone. By acting swiftly, you can still take advantage of crucial tax savings to transfer wealth for your future and the future of your heirs.
FSKS is On Your Side
As FSKS continues to monitor the proposed changes and how they may impact your estate plan, we strongly urge you to contact us to speak with Jennifer L. Holowach (jholowach@fskslaw.com) at 973-538-4700, who will help assist and guide you through ensuring your estate plan is protected.
