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Proposed Tax Reform Significantly Impacts Estate Planning—What You Should Do Now

Ada Clapp

9.28.21 | Client Alert

As you have likely heard, on September 13, 2021, the House Ways and Means Committee released its proposal for revenue raising tax changes to support President Biden’s $3.5 trillion “Build Back Better” reconciliation plan. The proposed legislation (the “Proposal”) must still work its way through the House Rules Committee and the Senate and will likely be modified or amended before being sent to the President. It is therefore too early to know with certainty what the final legislation will look like. However, because some of the proposals being considered will dramatically affect estate planning and could be effective as soon as the legislation is enacted, you may wish to consider your estate planning opportunities now before the new legislation is enacted.


The Proposal would accelerate the scheduled reduction of the Federal estate, gift, and generation-skipping transfer (“GST”) tax exclusion amounts from December 31, 2025 to December 31, 2021. These exclusions allow an individual to pass property to his or her heirs estate, gift, and GST tax free. The Proposal would cut the exclusions in half, from $11.7 million under current rules to $5 million indexed for inflation (estimated to be approximately $6.02 million for 2022). These robust exclusions were always intended to be temporary under the Tax Cuts and Jobs Act of 2017. The Proposal moves up the “sunset” date.

Effective Date:  The reduced exclusion amounts are effective for gifts made and decedents dying after December 31, 2021.


Under current rules, grantor trusts offer significant flexibility and tax advantages to a grantor. Many popular estate planning techniques designed to achieve significant transfer tax savings, such as grantor retained annuity Trusts (GRATs), spousal lifetime access trusts (SLATs), and irrevocable life insurance trusts (ILITs), are implemented using grantor trusts. The proposed legislation would eliminate most of the benefits of grantor trusts, effectively doing away with many of these techniques.

A grantor is deemed to “own” the property held in a grantor trust for income tax purposes. As a result, the grantor can enter into transactions, such as sales, loans, or asset swaps, with the trust without income recognition. Under these current rules, the grantor’s payment of the trust’s income or capital gains tax is not treated as a taxable gift from the grantor. This allows the grantor to reduce his or her taxable estate and the trust assets to grow income tax-free.  Many grantor trusts are carefully drafted so that, under current rules, the value of the trust property is not included in the grantor’s estate when the grantor dies.  The Proposal would dramatically change the way grantor trusts are taxed.

Transfer Taxes

The Proposal would include in the grantor’s gross estate the value of property held in a grantor trust at the grantor’s death. There would be an adjustment for amounts previously treated as taxable gifts, with the result that all appreciation on gifted property would be included in the grantor’s estate.

The Proposal would also treat distributions from a grantor trust (other than to the grantor or the grantor’s spouse or which discharge an obligation of the grantor) as taxable gifts by the grantor.  If during the grantor’s lifetime the grantor ceases to be treated as the “owner” of any portion of the grantor trust, the grantor would be treated as having made an immediate taxable gift of assets attributable to that portion. The aforementioned adjustment would apply.

Sales and Exchanges

The Proposal provides for sales and exchanges between a grantor and a grantor trust to be treated as sales to third parties for income tax purposes—except that losses would be disallowed. This change curtails the practice of swapping low basis assets out of a grantor trust (in exchange for cash) so that the assets could receive a basis step-up on the grantor’s death (thus eliminating the capital gain).  Under the new rules, the grantor would incur an immediate capital gain at the time of the swap. These new grantor trust provisions would not apply to a trust otherwise already includible in the grantor’s estate.

Effective Date:  These provisions would apply to (i) a grantor trust created after the law’s enactment (a “post-enactment trust”) and (ii) any portion of a grantor trust created prior to the law’s enactment (a “pre-enactment trust”) attributable to contributions made after the law’s enactment.

As the Proposal is currently drafted, the new rules would not apply to a pre-enactment trust that is fully funded prior to the law’s enactment (a “grandfathered trust”).  Under the Proposal, a grandfathered trust would not be included in the grantor’s gross estate, a distribution from such trust would not trigger a taxable gift, nor would termination of grantor trust status with respect to such trust.  The grantor of a grandfathered trust would still be able to engage in transactions with the trust without income recognition.

The proposed changes would apply to pre-enactment trusts to which “contributions” are made after the law’s enactment.  Because the Proposal does not define “contributions” it is unclear whether the term is meant to include only gifts to pre-enactment trusts or whether the term encompasses a decanting and/or an asset swap.  Until further guidance is issued, you should exercise caution when planning with a pre-enactment trust to ensure that you do not taint its grandfathered status.

Note:  It is important to note that the Proposal is still a “work in progress.” Accordingly, the effective date of the new rules and their application to pre-enactment trusts and post-enactment trusts as stated in the current draft legislation could well be modified prior to the law’s enactment.


The Proposal would significantly limit the ability to apply valuation discounts to the transfer tax value of interests in many closely held family entities (such as those holding mostly marketable securities).  The Proposal would eliminate valuation discounts for nonbusiness assets contained in a non-actively traded entity.  The nonbusiness assets are treated for transfer tax purposes as if the transferor transferred them directly to the transferee (the entity wrapper justifying the discounts is ignored).

The term “nonbusiness asset”  includes passive assets held for the production of income and not used in the conduct of an active trade or business. Passive assets include, among other items, cash or cash equivalents, equity interests, certain debt arrangements, personal property and real property—unless the real property is used in the active conduct of a trade or business and the transferor materially participates in the trade or business. There is also an exception for business working capital.

In addition, there are look-through rules which provide that if a passive asset is a 10% or greater interest in another entity, the transferor is treated as having transferred a ratable share of the assets of such other entity.

Effective Date:  The new rules would apply to transfers made after the date of the law’s enactment.


  • Use Your Exclusions.  If you have not fully utilized your gift and GST tax exclusions, you may want to do so before the end of the year.  If this planning will involve a grantor trust or interests in an entity holding nonbusiness assets, you may need to act sooner—before the proposed legislation is enacted.  In some cases, it may make sense to pay gift tax to fully utilize your GST tax exclusion.
  • Pre-Fund Existing Trusts.  As the Proposal is currently drafted, the grantor trust changes would not apply to pre-enactment trusts except to the extent of any post enactment contributions.  You may therefore need to plan ahead to avoid these tainting contributions.  If you make annual gifts to an ILIT to fund premium payments, consider funding the trust prior to the law’s enactment with enough assets to pay future premiums.  This might avoid having all or portion of the policy proceeds included in your estate, which could result from your making post-enactment gifts to the ILIT.
  • Accelerate Planning.  Consider accelerating certain transactions so that they are complete before the proposed legislation becomes law.  This would include sales with grantor trusts and transfers of interests in an entity holding nonbusiness assets.  Because it is unclear at present whether an asset swap or a decanting  will be considered a “contribution” under the proposed legislation, these transactions too should be accelerated.
  • Limited Opportunity Planning.  Because many of the estate planning techniques involving grantor trusts may be unavailable after the proposed legislation is enacted, you should consider creating and funding a grantor trust, such as a SLAT, a GRAT or a qualified personal residence trust, as soon as possible.  In addition, it may be more income tax efficient for you to own certain assets currently held in your grantor trust (such as low basis assets).  If that is the case, you should consider whether an asset swap or a sale prior to the law’s enactment is advisable.

While it may be difficult to make estate planning decisions until we have more clarity on certain provisions currently included in the Proposal, the window of opportunity to act is small and we therefore suggest that you begin these discussions immediately.  Please contact your Berdon advisor and your estate planning attorney to discuss what the proposed legislative changes may mean for you.

Berdon offers individuals, as well as family-owned and privately held businesses, a comprehensive set of professional services to help them achieve their strategic business and financial objectives.

Questions: Contact your Berdon advisor.