Estate Tax Reform Missing from Current Plan


For now at least, an early reduction in the estate tax exemption appears to be unexpected.

President Biden and Democrats in the House of Representatives on Thursday (10-28-21) changed their tax plan yet again as they seek ways to offset the cost of his dialed-back social spending and climate bill, now costing $1.75 trillion instead of the original $3.5 trillion.


As discussed in prior posts, up until now the primary targets to raise the needed revenue that affect estate planning have been the accelerated reduction of the estate tax exemption from $11.7 million to $5 million (adjusted for inflation), the inability to make transfers to a grantor trust that would be disregarded for income tax purposes, the inability to value minority or non-voting ownership interests in LLCs and other entities at a discount, and the loss of the step-up in basis of assets at death.


Earlier in the week, it began to look like there may be a controversial “billionaire tax” imposed instead of the above, which would have affected approximately 700 of the very richest Americans, including Amazon.com founder Jeff Bezos, Tesla founder and CEO Elon Musk and Facebook (soon to be Meta) co-founder and CEO Mark Zuckerberg. However, that proposed tax was recently tossed in the final stages of marathon negotiations.


According to Forbes, the apparent failure of the billionaire tax made the proposed accelerated reduction of the estate tax exemption feel even more likely. The President, however, mentioned nothing about estate tax legislation as being included or excluded from the current agreement, leading to even further uncertainty. The issue has since become more clear as a result of a “Build Back Better Framework” document released by The White House Briefing Room, which provides a few pages of summary documentation on tax increases that do not include any of the formerly proposed estate tax law changes described above, the proposed changes to grantor trusts, or (according to the New York Times) the formerly proposed loss of the step-up in basis.


As noted in Forbes, this is all not to say that such proposals “cannot be brought in later, but at this time it is at least unexpected.”


Instead of focusing on estate tax legislation, or the controversial (and arguably unconstitutional) billionaire tax, the current focus for funding the President’s spending and climate bill appears to be a new 5% surtax on individuals earning incomes above $10 million, and an additional 3% on incomes above $25 million. That is on top of the current 37% top income tax rate on ordinary income. For example, that would all translate to an additional $1.15 million in federal income tax for a CEO earning $30 million per year. There would also be new Medicare taxes that would close the loophole used by high earners who use S corporations and partnerships to shield themselves from this 3.8% tax.

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