Last week, the House Ways and Means Committee finished its draft of proposed legislation to implement the 2021-2022 federal budget. The items have been forwarded to the House Budget Committee for its approval along with the work of the other twelve committees tasked with implementing the 2022 fiscal year budget resolution.
Some of the proposed changes have been discussed previously by President Biden as part of the framework of his plan to fund the “American Families Plan.” However, there are a number of newly proposed tax changes included in the House Ways and Means proposal that will restrict existing planning options. The effective dates implementing the proposals occur at various dates prior to or as of introduction, upon enactment or as of the first of next year.

While there is an urgency to complete the necessary modifications prior to the various effective dates in order to maximize the benefits of your estate and wealth enhancement planning, remember that the proposed tax changes must still be deliberated, debated and negotiated in both the House and Senate Budget Committees with the goal of getting a majority in each house of Congress in order to pass the legislation.

• Estate Tax Proposals
  • Reverses the 2017 Tax Act increases made to gift, estate and generation-skipping transfer (GST) tax exemptions effective as of January 1, 2022
  • For 2021, the exemptions remain at $11,700,000
  • The Joint Committee on Taxation has estimated that the 2022 gift, estate and GST exemptions would be approximately $6,020,000
  • Those wishing to utilize the higher exemptions should do so prior to the end of the year
  • Surprisingly, no elimination of “step-up in basis” at death
  • Valuation discounts would be disallowed, after the enactment date, for the transfer of interests in an entity that owns passive assets not used in an active trade or business
    • Passive or “nonbusiness assets” described above would be treated and valued as if the asset was transferred directly to the transferee and will ignore the purported entity level transfer
    • For example, a transfer of 45% of a person’s Limited Liability Company (LLC) units of a LLC holding “nonbusiness assets” would be treated as a transfer of 45% of the assets of the LLC and no valuation discounts would apply
• Grantor Trust Rule Changes
  • New provisions would substantially alter the ability to use Grantor Retained Annuity Trusts (GRATs), Spousal Lifetime Access Trusts (SLATs), and other Grantor Trusts
    • Effective Date: The changes below will apply to:
      • Trusts created on or after the “enactment date” and
      • For the portion of any trust prior to the “enactment date” which is attributable to a contribution made on or after the “enactment date”
      • The “enactment date” is generally considered the date signed into law by the President
  • Grantor Trusts created or receiving a contribution after the enactment date will be included in the estate of the grantor at the grantor’s passing
    • There will be an available reduction for the amount of taxable gift made to the trust during the grantor’s life which effectively results in the appreciation being include
  • Distributions, other than distributions to the grantor or the grantor’s spouse, from such Grantor Trusts will be treated as a taxable gift by the grantor, with the same reduction for the taxable gift previously made to such a trust referenced above
  • Sales or transactions that occur after the enactment date between a Grantor and a Grantor Trust will be treated as a taxable event and require the recognition of any gain
    • It appears that trusts created and funded prior to the enactment date would be exempt from the above provision
  • Losses would be disallowed
• Individual Income Tax Proposals
  • Income tax bracket rate increases
    • Increases top rate from 37% to 39.6%’
      • Individual taxpayers with incomes above $400,000
      • Married Filing Jointly taxpayers with incomes above $450,000
      • Trusts and estates with incomes over $12,500
      • Effective date: January 1, 2022
  • Long-Term Capital Gains rate increases
    • Changes the 20% current top rate to 25% for capital gains and qualified dividends
      • Effective date for 2021: long-term capital gains recognized after September 13, 2021. Long-term capital gains recognized on or prior to that date will be netted with losses recognized on or prior to that date and remain subject to the 20% top rate
      • In addition, the 20% top rate will continue to apply if the gain results from a transaction entered into on or before September 13th and not materially modified
  • In addition, the current 3.8% net investment tax would be extended to apply to income derived in the ordinary course of a trade or business for individual filers with a modified adjusted gross income (MAGI) of $400,000 or married filing jointly taxpayers with MAGI of $500,000
    • Effective Date: Tax years beginning after December 31, 2021
• Roth IRA and Retirement Changes
  • Roth conversions would be limited to those individual taxpayers with less than $400,000 of income and married filing jointly taxpayers with less than $450,000 of income
  • After-tax contributions made to a Traditional IRA or 401(k) would no longer be eligible for conversion to a Roth IRA
    • Many high-income clients that were not eligible for a Roth contribution would utilize this procedure, commonly referred to as a “backdoor Roth contribution”
  • Additional restrictions would be enacted for those with retirement account balances exceeding $10,000,000 and income exceeding the Roth conversion limits above
    • No additional contributions could be made to IRAs by such individuals
    • In addition, a distribution of 50% of the amount by which their retirement account balance exceeds $10,000,000 must be taken each year
      • In the event that retirement account balances exceed $20,000,000 and an individual has a Roth IRA or Roth Retirement Plan, the individual must also take a distribution from their Roth account balance to bring the account balance below $20,000,000
  • The effective date for the above provisions would be for tax years beginning after December 31, 2021
• Miscellaneous Proposals
  • A 5% surtax would be applied to individual taxpayers with MAGI in excess of $5,000,000
    • This would apply to all income and for tax years beginning after December 31, 2021
  • Creates a phase-out of the Qualified Business Income Deduction under Section 199A for tax filers whose taxable income exceeds $400,000

NEXT STEPS
The existing proposals must still navigate Congress through the legislative process and are subject to modification and may not even become law. However, the potential tax law changes highlighted above fundamentally alter many existing wealth enhancement techniques and will require clients and their advisors to take quick action to benefit from the existing more favorable laws relating to their wealth enhancement planning.

Oxford Financial Group, Ltd. is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Oxford Financial Group’s investment advisory services can be found in its Form ADV Part 2, which is available upon request. The information in this presentation is for educational and illustrative purposes only and does not constitute tax, legal or investment advice. Tax and legal counsel should be engaged before taking any action. OFG-2109-13