Use It or Loose It - How Pending Tax Changes May Impact Taxpayers Part 2


On September 13, 2021 the House of Representatives’ Ways and Means Committee announced a new Tax Bill entitled, “Build Back Better” (BBB).

While the BBB has many facets which impact the economy the focus is on higher federal ordinary income taxes and capital gains (for those considered top tier earners), as well as, a reduction on federal gift and estate taxes, and an elimination of several effective estate planning techniques. In our three-part series we break down the BBB into three high level categories: 1. Federal Income Taxes, 2. Retirement Planning, and 3. Estate Planning.

Part 3: Estate Planning

Reduction in Gift and Estate Tax Exemptions

Under the Tax Cuts and Jobs Act (TCJA)[1], the current Gift and Estate Tax Exemption[2] amounts for an individual is $11,700,000 or $23,400,000 per married couple.  This enhanced estate tax exemption is scheduled to end on December 31, 2025, unless new tax legislation is enacted to modify when the sunset should occur.  BBB proposes to accelerate the sunsetting of the enhanced estate tax exemption to December 31, 2021, in addition to cutting the exemption level roughly in half – from $11,700,000 to approximately $6,000,000[3].  Taxpayers might want to consider accelerating lifetime gifts in 2021 as they likely face a use it or lose it situation as it is not anticipated that Congress will re-implement these enhanced estate tax exemption levels for the foreseeable future.  2021 might be the last time for a long time that taxpayers can move significant wealth outside of their estates for estate tax purposes.

Impairment/Elimination of Grantor Trust

When it comes to Income Taxes, there are two types of trusts: (1) Grantor Trusts; and (2) Non-Grantor Trusts.  The differences between the two trusts is simple – if the trust pays its own income taxes it is a Non-Grantor Trust; if it does not, the trust is a Grantor Trust.  The distinctions between Grantor and Non-Grantor are important since the Internal Revenue Code (IRC) provisions, which cause a Trust’s assets to be treated as a Grantor Trust for Income Tax purposes, are not identical to the IRC provisions which do the same for Estate Tax purposes[4].  This tax bifurcation creates a powerful estate planning technique called an Intentional Defective Grantor Trust (IDGT).  IDGTs are extremely effective for tax planning purposes as it shifts assets outside of the Grantor’s estate for estate tax purposes while allowing the assets to grow de facto tax-free by having the Grantor pay the income taxes on the assets while simultaneously reducing the Grantor’s taxable estate through those income tax payments. 

 Under the BBB proposals, any trust treated as a Grantor Trust for income tax purposes would be included in the Grantor’s estate for estate tax purposes – effectively eliminating the benefit of shifting those assets outside of the Grantor’s estate.  Further, any transfer out of a Grantor Trust to a third-party beneficiary would be treated as a taxable gift of the “deemed owner” (i.e., the Grantor) for estate tax purposes.  Even further, any sale between an individual and their own Grantor Trust would be deemed the equivalent of a taxable sale to a third-party unless the trust is fully revocable[5].

The effective date for the proposal is the date of enactment of the BBB meaning any preexisting IDGTs would still be grandfathered in with only new Grantor Trusts becoming subjected to these more restrictive rules.  However, any new additions to the existing IDGTs would cause the grandfathered IDGT to be subject to the new rules for any portion of the trust which was funded after the BBB enactment.  As a practical matter, any Grantor Trusts which have not been fully funded will want to do so before the BBB enactment and anyone who wants to take advantage of Grantor Trusts will have to create and fund these trusts before enactment.

We encourage you to reach out to your Wealth Advisor and seek counsel from your Tax professionals if you have or want to implement any of the following Trusts to determine if any changes should occur to your existing Trusts before BBB enactment:

  • Grantor Retained Annuity Trust (GRAT)
  • Intentionally Defective Grantor Trust (IDGT)
  • Irrevocable Life Insurance Trust (ILIT)
  • Qualified Personal Residence Trust (QPRT)
  • Spousal Lifetime Access Trust (SLAT)

Family Limited Partnership Discounts Reduced

Family Limited Partnerships (FLPs) take advantage of minority interest discounts available to non-Family Partnerships including lack of control and lack of marketability.  These discounts effectively allow the gifting family member to gift more assets to the FLP than what it costs them in estate tax exemptions.  Under BBB, these discounts will remain in place for legitimate operating family businesses but will be eliminated in any FLPs which own “non-business assets.”  Non-business assets are defined as any passive investment asset not used in the active conduct of a business, and includes a wide range of investment assets, including cash, stocks, partnership or profit interests, bonds, options, forwards or futures, other commodities, foreign currencies, REITs or mutual funds, precious metals, annuities, assets that produce royalties, collectibles, and real estate.  Further, any entity which owns 10% interest in another entity (e.g., partnership that itself owns another partnership) will be subject to a look-through rule[6].

Next Steps

BBB proposals are subject to change through the Legislative and Democratic process.  We encourage you to reach out to your Wealth Advisor as soon as reasonable to discuss how you might be impacted by these changes and what appropriate next steps might be.  If BBB is enacted, there will be limited time – if any – to implement appropriate changes for individuals.


It should be noted from the onset that BBB is a Tax Proposal which has not been approved by the Senate nor has it been presented to President Joe Biden for approval as of publication.  All tax proposals might be subject to significant changes as the Bill is negotiated further in Congress.  The above Insight is intended to provide a high-level overview of the items which Congress is seeking to address through Tax Legislation.  Time is of the essence before new Tax Laws are enacted.  Opinions expressed are only our current opinions or our opinions on the posting date. Any graphs, data, or information in this publication are considered reliably sourced, but no representation is made that it is accurate or complete, and should not be relied upon as such. This information is subject to change without notice at any time. Please reach out to your Wealth Advisor to learn more information as well as seek the appropriate Tax counsel from your Attorney and/or Accountant. 

[1] Tax Cuts and Jobs Act was enacted by President Donald Trump on December 20, 2017.

[2] Collectively to be referred to as “Estate Tax Exemption.”

[3] BBB Bill Section 138207, Final Estate Tax Exemption to be determined based on Inflationary Adjustments but anticipated to be between $5,500,000 and $6,000,000.

[4] IRC Sections 671-6678; 2031-2046.

[5] BBB Bill Section 13801 and 138209

[6 ] BBB Bill Section 13801 and 138209 and IRC Section 2031

Back to Insights
Posted by