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The Build Back Better Act may affect estate plans

On Behalf of | Sep 20, 2021 | Uncategorized |

With each new administration comes new laws and taxing policies. For this new administration, it is the Build Back Better Act, a $3.5 trillion legislative measure that will make various changes to the tax code. And, for those looking to plan ahead, this post will discuss a couple of the new law’s implications.

Grantor trusts

Grantor trusts are treated like a person’s alter ego for income tax purposes. This means that the income and deductions that below to the grantor trust assets are placed on the grantor’s tax return. This has meant that it has been used to transfer wealth into this trust, like selling assets to the trust for low interest rate promissory notes. As long as the assets appreciate more than the interest rate on the loan, it is essentially a tax-free wealth transfer. Indeed, even interest generated from the loan are income tax free, and the sale of the assets to the trust do no trigger capital gains.

Grantor trust changes

However, under the BBB Act, under Section 1062, the gain would be recognized and would deny the recognition of any loss. Though, the interest payments would still be income tax free. This bill also changes how grantors can swap equivalent value assets between the trust and the grantor. This has not triggered capital gains taxes, but these equivalent exchanges would trigger capital gains if the BBB Act is passed. Though, the new tax treatment would only apply to grantor trusts (not revocable trusts) that are created after the BBB Act goes into effect. Existing trusts affected by the BBB Act would be grandfathered in under the old tax scheme.

Estate taxation

Under the new Section 2901, trusts created after the BBB Act is enacted (not revocable trusts) would have their estate taxation treatment changed. First, when the grantor of the grantor trust dies, the trust’s assets will be deemed part of the grantor’s estate. Second, distributions to anyone other than the grantor themselves, to a grantor’s debtor or to the grantor’s spouse are taxable gifts. And, if the grantor trust is dissolved during the grantor’s life, it is also treated as a taxable gift.

As our Indianapolis, Indiana, metro area (including Hendricks County, Hamilton County and the Marion County) residents can see, the BBB Act will have a significant affect on estate planning. But, the changes are for those estate tools made on or after the BBB Act is enacted, which means refreshing and updating the estate plan now should be done, prior to its enactment.