Potential Estate Planning Tax Impacts of the Proposed Reconciliation Bill

On September 13, 2021, the House Ways & Means Committee of the U.S. House of Representatives released the draft text of its proposed budget reconciliation bill (the Build Back Better Act [First Draft]”), and on September 15, 2021 it approved various sections of the proposal. The Committee released an updated draft on October 28, 2021 (the “Build Back Better Act [Second Draft]). The Second Draft omitted many sections from the First Draft kept the rest with relatively little alteration. The Committee released a further draft on November 3, 2021 (the “Build Back Better Act [Third Draft]”) which returned certain sections from the First Draft. On November 5, 2021, the changes detailed below were approved by the Senate and are going to be voted on in the House of Representatives. This document reflects the potential tax implications for the Third Draft. 

It is important for clients to note that as of the date of this article, these proposals are not the law, and are subject to ongoing negotiations. The proposed provisions could change considerably and there is no guarantee that any of the provisions will become law. Nevertheless, this article is to alert clients of the potential changes to individual taxpayers and the resulting consequences of such changes if they are approved. We encourage our clients to be proactive and plan in advance of possible impending changes.  

Potential Tax Impact on Estate Planning: Effective – January 1, 2021

  • Allowable State and Local Tax Deduction (§137601): If passed, an estate or a trust may deduct up to $36,250 for state and local taxes.

Potential Tax Impact on Estate Planning: Effective – January 1, 2022 

  • Net Investment Income Tax Expanded (§138203): Under current law, a 3.8% tax is imposed on Net Investment Income (NII) on certain individuals, estates, or trusts if a trade or business is a passive activity for the taxpayer (i.e., the taxpayer does not materially participate in the trade or business). In other words, the 3.8% tax does not apply to income from a trade or business conducted as a sole proprietor, partnership, or S Corporation, if the taxpayer materially participates in the trade or business. Under the proposal, the 3.8% tax would be imposed on the NII of high-income individuals (taxpayers with greater than $400,000 in modified adjusted gross income (single filer) or $500,000 (joint filer)) regardless of whether the trade or business is a passive activity for the taxpayer so long as the income isn’t already subject to the Federal Insurance Contribution Act (FICA) or Self-Employment Tax.
     
    Additionally, the current tax is 3.8% of the lesser of NII or the excess of modified Adjusted Gross Income (AGI) over a set dollar amount. For trusts and estates, the current tax is 3.8% of the lesser of undistributed net income, or the excess of AGI over a set dollar amount. The drafted legislation also proposes to expand the definition of the NII subject to the tax by stating the 3.8% tax would apply to the greater of specified net income or NII. For trusts and estates, the 3.8% would apply to the lesser of (1) the greater the undistributed specified net income or undistributed NII; or (2) the excess AGI over the set dollar amount. 
  • Surcharge on High Income Estates and Trusts (§138203): Any modified AGI of an estate or trust in excess of $200,000 would now be subject to a tax equal to 5%. In addition, any modified AGI of an estate or trust in excess of $500,000 would now be subject to a further tax equal to 3%.

NOTE: This article does not list all of the legislation being proposed in the Build Back Better Act. It is merely a list of the provisions we believe to be most relevant to a majority of our clients. Please contact your estate planning attorney to discuss the potential legislation and how it may or may not affect your planning needs. Although it is impossible to know which provisions will pass, possible tax-planning strategies may still be available to those who would like to act in advance of the impending change.  

Contributing Advisors