Some of our readers have likely heard of the $3.5 trillion legislation known as the Build Back Better Act. But, what many may not know is that, along with its sweeping infrastructure improvements, to pay for those items, the BBB Act make several changes to the U.S. Tax Code.
Grantor retained annuity trusts
GRATs have been an estate planning tool since the 90s, and they are one of the most widely used taxpayer transfer trusts. In a GRAT, the grantor transfers assets to the trust, but the grantor can still take payments over a few years that are about the same value as the contributed assets. Under the current tax code, this means that the gift to the trust is not taxed, and if the trust asset appreciate, that appreciation can transfer tax free, as long as the grantor survive the GRAT annuity term.
Section 2901 of the proposed BBB Act changes this because GRATs will not longer qualify as beneficial. This means that at the end of the annuity term, the trust assets will still be part of the estate tax calculation. If those assets pass to a child or to a non-grantor trust, they will be treated as a gift and subject to the gift tax. This essentially eliminates any benefit of a GRAT. What is worse, under Section 1062, any appreciation could trigger capital gains taxes.
Another form of a grantor trust is called an insurance trust. These are used to ensure that someone’s life insurance is not subjected to the estate tax. The insurance premiums are paid through making annual gifts to the insurance trust. While existing insurance trusts will be grandfathered, future insurance trusts will lose some of their tax benefits. Specifically, premium contributions will result in at least that portion being taxable, and taxpayers will be responsible for tracking these payments to avoid IRS fees and penalties. Plus, the death benefit itself will also become taxable as part of the estate tax.
As our Forney, Texas, and Dallas–Fort Worth metroplex readers can see, the BBB Act will make significant changes to the tax code. This is why it is so important to get an estate plan updated or created now, before the new tax code becomes law.