The Democrats recently released their proposed tax plan, which contains President Joe Biden’s ‘Build Back Better’ initiative. Boiled down, Biden’s agenda is aimed at creating jobs and cutting taxes for working families, which will be paid by larger corporations and wealthier individuals through yet another tax increase.

Nothing has been passed yet, but it is important to understand how this tax plan could impact you, especially as it pertains to your present estate plan. Here is a breakdown.

Estate and Gift Tax Exemption Changes

In 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA) into law, which doubled transfer tax exemptions to $10 million. This was adjusted for inflation, so in 2021, the exemption was $11.7 million per person and $23.4 million per married couple. Biden’s proposed tax plan will reduce this by more than half starting at the beginning of 2022, making it $5 million per donor and $10 million per married couple. If you want to take advantage of these higher exemptions, consider making gifts before the end of the year. 

Valuation of Non-Business Assets 

As part of one’s estate planning strategy, it is common to transfer minority interests in family holding entities that are funded with cash and marketable securities to take advantage of minority discounts. However, under this new agenda, only operating businesses will be able to enjoy this benefit.

If the new tax plan passes, interests that are transferred must be appraised in two phases. First, non-business assets should be valued like they were coming directly from the transferor, meaning no valuation discount will be applied. Second, the interest will be valued using the “willing buyer-willing seller analysis”, but the value of any non-business assets will be disregarded. 

Transactions for Grantor Trusts

If enacted, this legislation will likely include changes to how grantor trusts are taxed. Traditionally, there has been no capital gain on the sale of appreciated assets, and interest payments for the associated promissory note were also not taxed. Section 1062 of this new agenda would require that gains be recognized on these sales, but there would not be any recognition of losses. 

This legislation could also impact what grantor trusts remain viable for estate planning. It may be wise to accelerate your planning, as any changes before the date of enactment would be grandfathered in under the new law.

Valuation of Total Assets

The Democrats have proposed some major changes under their latest tax plan. We advise obtaining a qualified appraisal before the possible 50 percent reduction in gift tax takes place on January 1, 2022. At Appraisal Economics, our team of experts can help families and business owners understand their current tax exposure.

A solid estate tax planning strategy is always recommended, regardless of the asset classes involved. Planning for succession can also be a vital part of this strategy. Contact Appraisal Economics today before this new potential legislation goes into effect!