New Budget Reconciliation Package: Plan NOW for the Estate Tax Overhaul

Throughout 2021, SAX has been warning of dramatic and substantial structural changes that will severely impact estate planning opportunities.

The recently proposed budget reconciliation package based upon the President’s Build Back Better Act would bring sweeping changes to estate taxation that would immediately become the costliest in generations if enacted, and are so expansive in reach that they may adversely affect millions of families.  Taxpayers will need to act NOW or risk losing the closing window of time to take advantage of significant planning opportunities under current law.


To understand where we are going with estate and gift taxes, it’s important to understand where we currently are.  Under current law, the 2021 exemption is $11.7 million per taxpayer.  That’s $23.4 million per married couple.  The exemption is the aggregate amount that can be given away during your lifetime.  Under current law, the exemption that currently exists is going to be automatically reduced in 2026.

Here are some changes the budget reconciliation tax law would bring about:

  • The estate tax exemption would be reduced as of January 1, 2022 from its current $11.7 million to $5 million, adjusted for inflation. As a result, any taxpayer who has not made gifts of $11.7 million before the end of 2021 could lose the opportunity to transfer assets in excess of about $5.5 million without a transfer tax of about 40%.
  • Valuation discounts would be disallowed on “nonbusiness assets” based on the lack of marketability or lack of control.
  • Non-business assets of an entity are valued as if the asset was transferred directly.
  • Non-business assets are those assets which are not used in the active conduct of a trade or business.
  • Passive assets are those which are not used in the active conduct of a trade or business.
  • No discounts allowed if the transferee and family members have control or majority ownership.
  • Technical changes would reduce efficacy of planning techniques like grantor trusts specifically:
    • Appreciation on assets contributed to a grantor trust after date of enactment of the reconciliation bill will be pulled back into the grantor’s taxable estate for estate tax purposes.
    • Sales to grantor trusts after enactment of the reconciliation bill would be subject to capital gains treatment.
    • Distributions from a grantor trust during the life of the deemed owner would be taxable gifts, less any amount already treated as a taxable gift.

These technical and structural changes are more problematic than the exemption changes and tax rate changes.  We believe these are going to really rock the foundation of traditional estate planning.

  • “Portability” is retained, which is the ability of the surviving spouse to safeguard the first to die spouse’ exemption.

Preemptive Planning Paramount!

While the reconciliation package would not result in the halving of the lifetime exemption until January 1, 2022, the effective date of the portions of the reconciliation package that apply to grantor trusts and valuation discounts will be the date of enactment.  It is possible for a reconciliation package to be enacted in September 2021.

Advantages of planning now include:

  • It appears that grantor trusts established before enactment may be grandfathered.
  • Valuation discounts should be available until any new laws are enacted.
  • The time before enactment may be a last chance opportunity to lock in current exemptions by using grantor trusts without entirely giving up access.
  • Remember, moving assets to a trust can protect from suits and claims, elder financial abuse, and your kids’ divorce, so there may be multiple, even non-tax reasons to act.

The Right Advisors

It has been said that it takes a village to raise a child.  Similarly, it takes a robust team of trusted advisors to construct a meaningful estate plan.  Before making any decision or taking any action, you should consult professional advisors who have been provided with all pertinent facts relevant to your particular situation.  We are dealing with an uncertain, changing tax environment that could impact you in big ways, and it is important that you have a CPA, planning attorney, valuation professional (if applicable), wealth advisor, insurance consultant and corporate or real estate counsel (if you’re transferring business or real estate interests), in order to ensure that your planning strategies are thoughtful and strategic, based on your short- and long-term goals.  It is vital that your advisory team has in-depth knowledge of the changes that are coming down the pike and how they may impact you and your particular situation.

In Conclusion

The future of estate tax planning appears to be coming into focus now that the ambitious Build Back Better Act has been reduced to written word in the budget reconciliation package.  It is critical that you prepare for the worst and hope for the best.  By planning carefully and creatively now, you could take advantage of massive opportunities that – very soon – may no longer be available .  Act now, but act with caution.

About the Author

JOY MATAK, JD, LLM is a Partner at Sax and Co-Leader of the firm’s Trust and Estate Practice. She has more than 20 years of diversified experience as a wealth transfer strategist with an extensive background in recommending and implementing advantageous tax strategies for multi-generational wealth families, owners of closely-held businesses, and high-net-worth individuals including complex trust and estate planning.  She can be reached at [email protected].

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