Year-End Tax Planning for New Tax Laws: Estate Taxes

In our previous two articles, we covered the proposed individual tax changes and business tax changes that have been proposed as part of the American Families Plan backed by President Biden and the House Ways & Means Committee. The goal here is to talk about these tax changes ahead of time. Many of them will take effect as of January 1, 2022. That’s why you need to know which ones affect you and update your financial planning as needed.

Today, we want to discuss some of the key tax changes that will be affecting estate taxes and gift taxes.

Reduced Estate & Gift Tax Exemption

This is one of the most significant changes in the American Families Plan. The estate and gift tax lifetime exemption would be cut in half from it’s current total of $10 million per person (scheduled to be raised to $11.7 million in 2022) down to $5 million. This change would apply to estates of decedents dying and gifts made after December 31, 2021. This may impact some estate plans and year-end gift-giving strategies for many families, especially if you haven’t yet exceeded the annual gift tax exemption amounts. 

Grantor Trust Taxation

The new tax code would require grantor trusts to be included as part of the decedent’s taxable estate, provided the decedent is deemed the owner of the trust in question. Many wealthy taxpayers currently use grantor trusts to keep assets out of their estate while still maintaining close control of the trusts. The new tax changes seek to eliminate some of the loopholes and make these trust assets taxable as part of the decedent’s estate.

Limited Partnership Discounts

The American Families Plan would deny charitable deductions for contributions of conservation easements by partnerships and pass-through entities. This denial only goes into effect if the deduction amount exceeds 2.5 times the sum of each partner’s basis in the partnership that relates to the property being donated. The IRS currently lists these transactions as “syndicated conservation easements.” The new tax code would provide an exemption for property donations meeting a three-year holding period requirement, as well as contributions made by family partnerships. If enacted, the provision would be made retroactive to affect contributions made after December 23, 2016.

It is important to understand the changing tax landscape, especially under the new administration which has polar opposite tax views as the previous one. As expected, most of the proposed tax changes in the American Families Plan are aimed at wealthier taxpayers and larger corporations, with a majority of the provisions from the Tax Cuts and Jobs Act (TCJA) designed to help small businesses and low-to-medium income taxpayers still in place.

If you have questions about your 2022 tax plan, business plan, estate plan or overall financial plan, contact Illumination Wealth today and speak with one of our experienced financial planners.