Dear Clients and Friends:

After President Biden announced his Build Back Better compromise framework on October 28, 2021 ( ), the House Rules Committee later released a revised bill (H.R. 5376) reflecting the compromise. The bill reflects a significantly pared down proposal for their budget reconciliation package. Moderate Democrats, like Senators Sinema and Manchin, and Congressman Neal, succeeded in reducing the Democrat spending package by nearly $2 trillion less than proposed. Though substantially revised with less dramatic tax provisions affecting individuals, the bill remains subject to potential modification as it meets the Senate and the reconciliation process. Some have suggested that a bill could be voted on in the first week of November, though others believe it will be closer to Thanksgiving. Once again the there exists no certainty as the bill meets the Senate where major tax increases on the wealthy had been proposed.

Despite the uncertainty, many of the former proposals that caused major transfers of wealth by individuals and their tax planners could become moot but not necessarily ill advised or unwise. Senator Sinema was successful in avoiding increases in tax rates on all but .02% of taxpayers. Proposed changes that would have raised the highest marginal income tax rate for individuals from 37% to 39.6%, for corporations from 21% to 26.5%, and capital gains from 20% to 25% have been eliminated. The current rates would therefore remain unchanged for tax year 2022. Also scrapped from the revised bill are the bulk of the retirement-related provisions. The House bill proposed limiting contributions for high income taxpayers to certain retirement accounts in excess of $10 million, requiring distributions from accounts in excess of $10 million, prohibiting pre- and after-tax Roth conversions, and prohibiting investments in assets that require the retirement account owner to be an accredited investor. None of these proposals made it into the revised bill; nor did changes to carried interest, or the proposed limitations on the ability of high-income owners of pass-through entities to deduct up to 20% of the income from a qualified trade or business. The reduction of rates of exclusion of gains from qualified small business taxation under IRC § 1202 remains, limiting exclusion to 50%.

The proposal to decrease the estate and gift tax exemption from its current $11.7 million to approximately $6 million per individual in 2022 was similarly removed, as were proposed changes to grantor trust taxation that would result in major negative effects on irrevocable life insurance trusts, grantor-retained annuity trusts, and the ability to continue funding grantor trusts (which include many spousal lifetime access trusts and other dynasty trusts). Assuming this revised bill passes, the gift and estate tax exemption will increase with inflation in 2022, to in excess of $12 million per person and, providing it is not reduced sooner, will continue to increase until it automatically is reduced in half in 2026. While most estate planning transactions should continue unabated, the urgency to shift wealth to vehicles exempt from the estate and gift tax system appears to have dissipated, though there is no certainty over what the final legislation will include. As a result, our view is not a whole lot different than it has been:

• Funding trusts that are exempt from the estate and gift tax system at the earliest point in time secures not only use of currently available exemptions, but permits the growth of that wealth to also be exempt and oftentimes creditor protected;
• Negative capital gains implications by avoiding taxation of that transferred wealth in the estates of the transferor can be overcome under present laws through proper planning, thus securing a step-up in cost basis at death- under the view of many commentators and as we have successfully achieved for a number of clients;
• The pressure associated with the timing of gifts in advance of the effective date of tax reform has abated, permitting greater time between alternative transactions, which helps confront issues associated with the “reciprocal trust doctrine” – ;
• Added time permits the hedging of trust planning and the use of a wider variety of traditional planning techniques designed to use present law to exempt wealth from the wealth transfer tax system; and
• Should clients that made gifts to properly designed trusts in the 2nd, 3rd, and 4th quarters of 2021 desire to terminate the trust or elect not to use the transferors gift tax exemption, there may remain time to achieve that objective, though the above should be considered.

Once again there is no certainty concerning what final tax reform will contain, but there appears to be less pressure to act in a hurried manner. We remain available to consult with clients, and if there are any questions or comments, please contact us.

Best regards,

Joe Kempe

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