Preservation | Family Wealth Protection & Planning

While the explanations generally follow the language of the text released by the House Ways and Means Committee proposal, there are a few items of clarification and changes.

Estate and Gift Tax Exemption Inflation Adjusted Amount Calculated

According to the Report, the staff of the Joint Committee on Taxation estimates that if the law is enacted, the lifetime estate and gift exemption amount beginning January 1, 2022, would be $6,020,000. 

Explicit Targeting of “Intentionally Defective Grantor Trusts” and Override of Rev. Rul. 85-13

With respect to grantor trusts, the Report specifically identifies “intentionally defective grantor trusts” as a type of trust targeted by the legislation.  In fact, the Report goes so far as to recognize that the language included in the proposal is meant to override the long-standing, non-recognition rule found in Revenue Ruling 85-13. Rev. Rul. 85-13 provides that a transaction involving the transfer of assets between a grantor and a grantor trust is a non-event for federal income tax purposes. 

The explanation in the Report makes clear that grantor trusts created on or after the date of enactment would be included in the estate of the deemed owner at death.  In addition, any contributions to a pre-existing grantor trust, that is, a trust created before the date of enactment of the law, would cause a portion of that trust to be included in the estate of the deemed owner at death.

Transfers Between the Deemed Owner and a Grantor Trust would be Taxable to both Grandfathered and Post-Enactment Grantor Trusts

One change made by the Report from the text of the proposal is that with respect to sales or exchanges between the deemed owner and the grantor trust, a gain realization and recognition event can occur whether or not the trust was created before, on, or after the date of enactment of the law. That is, sales to pre-enactment grantor trusts (“grandfathered trusts”) that have received no additional contributions post-enactment would still be subject to the gain realization rule.

This varies from the text in the House Ways and Means Committee proposal. That text appeared to only apply the gain realization rule to post-enactment grantor trusts or grandfathered grantor trusts that received contributions. The Report indicates in a footnote that a technical correction will be required with respect to the text of the final bill.

This change to the application of the gain realization rule will likely be the final nail in the coffin for the ability to enter into installment sales or asset swaps with all grantor trusts, even those created and funded prior to enactment.  

We will continue to monitor the progress of this legislation as it proceeds through Congress. For more information or if you wish to discuss how this proposal could impact your plan, please reach out to an attorney in our Trusts & Estates practice group.