Looming Estate Plan Disruptions

Are You Prepared?

Planning & Strategy Special Topics Taxes

“Have you not reserved even some type of blessing for me? Has my brother really taken everything?!” cried Esau. Isaac answered, “Behold, I made him a master over you, and I gave him all his brothers as servants, and I have sustained him with corn and wine; so for you then, what shall I do, my son?”
– Genesis 27 : 36-37

Jacob may have caused the first recorded major disruption to a family’s long-term estate planning goals. While there is no familial deception or lentil soup traded for birthrights, numerous changes lurk in the current reconciliation bill snaking its way through Congress and it could have major ramifications to the plans you worked up just a few years ago.

We applaud family businesses and their advisors setting up estate plans with more guardrails than deathbed blessings, but would we be remiss if we failed to ask: Have you pulled out those documents recently?  

Below we briefly touch on planning vehicles and structures as well as valuation tools currently being debated in the reconciliation bill and why they are important to many family business owners and advisors.

Estate & Gift Tax Exemption

The current law provides an estate and gift tax exemption of $11.7 million per individual or $23.4 million for a married couple.  This provision is currently set to sunset December 31, 2025.  Previous guidance has stated any gifts made prior to any changes to the exemption will not be clawed back.

The current proposal rolls back the exemption amount to $6.02 million per individual adjusted for inflation or $12.04 million for a married couple, slashing the benefit effectively in half.  The effective date of change under the current proposed bill is January 1, 2022.

Individuals who anticipate their estate may exceed the lower threshold of $12.04 million should consider executing estate planning strategies to transfer that wealth before the end of the year, including gifting to descendants or a trust (more discussed below).  In less eloquent terms: Use It or Lose It!

Trust Changes

The “Bull Moose” would likely beam with pride regarding the current reconciliation bill’s “Trust busting” features.  In general, many of the law’s provisions are meant to curtail, if not outright eliminate, tools utilized by estate tax advisors and attorneys.  Many of the changes are expected to become effective either 1) at signage of the bill or 2) January 1, 2022.

The National Law Review provided a good summary regarding Grantor Trusts. In general, the current reconciliation bill largely eliminates many of the estate planning benefits of grantor trusts (trusts deemed to be owned by the creator of the trust or another person (each referred to as a “grantor”) for federal income tax purposes). The following rules would apply to trusts created on or after the date of enactment and to existing trusts to the extent transfers are made to such trusts on or after the date of enactment.

  • Estate Tax Inclusion – Assets owned by a grantor trust would be included in the grantor’s estate and subject to estate tax upon the grantor’s death.
  • Distributions as Gifts – Distributions from a grantor trust during the grantor’s lifetime would generally be treated as taxable gifts.
  • Taxation Upon Termination of Grantor Trust Status – If the trust’s grantor trust status is terminated (i.e., the trust becomes a separate taxpayer from the deemed owner), the grantor would be deemed to have made a taxable gift of the trust assets.
  • Gain Recognized Upon Transfers to Grantor Trust – Transfers between a grantor trust and its grantor would be subject to income tax regardless of when the grantor trust was created.

A key piece you and your planning team need to consider is, as it reads:

The Legislation would apply to all post-enactment transfers between a grantor and grantor trust, including grantor trusts created prior to the date of enactment.

Therefore, a sale or swap of assets after the Legislation’s effective date between a pre-enactment grantor trust and its grantor would be an income tax realization event.  Likewise, a GRAT annuity payment made in kind with appreciated assets to the grantor, after the Legislation’s effective date, would be an income tax realization event.  With respect to these grantor trust provisions, the House Bill includes a footnote which states, “A technical correction may be necessary to reflect this intent.”

Grantor trusts are a big deal, but many other trust structures could fall under some of the same new, restrictive rules, including the following:

  • Grantor Retained Annuity Trusts (GRATs)
  • Qualified Personal Residence Trusts (QPRTs)
  • Grantor Charitable Lead Annuity Trusts (CLATs)
  • Spousal Lifetime Access Trusts (SLATs)
  • Irrevocable Life Insurance Trusts (ILITs)

Gassman, Crotty, & Denicolo, P.A. had a great webinar recently to cover several possible changes to these vehicles. You can check it out here.

Valuation Discounts for Passive Assets

In a business valuation setting, valuation discounts for lack of control, lack of marketability, and lack of voting rights are allowed, but often require substantiation, quantification, and defense by a business appraiser communicated in a formal appraisal report.

As discussed in Mercer Capital’s Auto Dealer blog, the current version of the reconciliation bill proposes to eliminate valuation discounts for an entity’s “non-business”, or passive, assets including certain cash balances, marketable securities, equity in another entity, or real estate.  Actively utilized working capital or real estate for business operations would not be considered “passive.”  The effective date of enactment would be January 1, 2022.

We would argue discounts for lack of marketability and control represent quantifiable economic realities facing minority owners in nonmarketable passive entities. Regardless, the law’s impact would be large. Often, combined discounts for lack of control and marketability can range from 25-45%.

An option business owners should consider is triggering a valuation of minority ownership positions with a valuation date prior to the effective law date.  A 25%-45% increase in reportable gifts would only be compounded by the law’s lowering gift tax exemption (discussed previously).


We provide valuation services to families seeking to optimize their estate plans and we work with estate tax attorneys all across the country. Give one of our professionals a call to discuss how we can help you in the current environment.