On September 13th at 11:20 pm Eastern time, House Ways and Means Committee Chairman Richard Neal (D-Mass.) released long-awaited details on Democrats’ proposed funding for the $3.5 trillion American Families Plan. The House’s tax plan differs from President Biden’s in many respects and includes some pleasant—and unpleasant—surprises.
Investors should not panic. The House proposal is the first pitch of a nine-inning game, one that is likely to produce many twists and turns. Some—and perhaps many—of the House proposals will not be enacted. The most important takeaway from the House proposal? Estate and gift tax laws now appear likely to change, perhaps dramatically. Those who have postponed implementation of lifetime wealth transfer strategies should execute those plans as soon as possible. It’s not clear whether proposed changes in the House bill will become law, but one thing is certain: Future tax laws are unlikely to become more favorable than they are right now. Investors who can afford to act should act now.
Things to think for now:
- If a client has any plans to transfer wealth to a grantor trust (IDGT, SLAT, GRAT), then they should do so immediately. That must be completed before the new law is enacted, as these tax shelters would become part of the estate again, and subject to taxes.
- QSBS owners wouldn’t be 100% tax-free, and they would have to pay taxes on 50% of their shares. The change in the exclusion would be retroactive to Sept. 14, but if they had plans to gift it to a non-grantor trust, they can still do that in the future.
- Proposed is a cut in the per-person estate tax exemption to roughly $6 million from $11.7 million. For married couples, the exemption drops to just above $12 million from $23.4 million. This becomes effective January 1, 2022, so if they plan to gift more than $6 million, they should do so before year-end.
- The top capital-gains tax rate is bumped to 25% from 20%. If passed, the increase would apply to all transactions completed after Sept. 13, 2021. Unless the proposed legislation changes, it’s too late to sell and realize capital gains under today’s lower rates. I suppose since the marginal income tax rate is increasing from 37% to 39.6% (effective 1/1/22) plus a 3% surcharge on income over $5 million (effective 1/1/22), a client might consider looking for opportunities to accelerate income from 2022 into 2021.
Please reach out to Troy if you have further questions or a client who might want to discuss this further. https://www.bernstein.com/our-team/locations/seattle/troy-niehaus.html