Tax Changes for Estates and Trusts in the Build Back Better Act (BBBA)

Tax Changes for Estates and Trusts in the Build Back Better Act (BBBA)

October 22, 2021
Tax Changes for Estates and Trusts in the Build Back Better
Act (BBBA)
The Build Back Better Act (BBBA; H.R. 5376) would
minority discounts when an heir receives a minority share
revise the estate and gift tax and treatment of trusts. It
in a company, and courts often allow significant discounts,
would eliminate the temporary increase in exemptions
even if disputed by the Internal Revenue Service. The
enacted in the Tax Cuts and Jobs Act (TCJA; P.L. 115-97),
rationale is that the individual does not have a controlling
increase the limits on certain discounts of value for
interest, which reduces the value of the assets. One practice
businesses to reflect use rather than market value, eliminate
used to reduce estate tax value is to transfer cash and
minority discounts for cash and readily marketable
marketable securities to a family firm with the heirs each
securities, and revise the rules for grantor trusts.
receiving a minority share, leading to a discount on these
amounts as well as the value of business assets.
Changes in the Estate and Gift Tax
Exemption
The BBBA would disallow discounts for cash and readily
The estate and gift tax applies on a unified basis on lifetime
marketable securities contained in a private corporation or
gifts plus the estate at a 40% rate after deducting an
partnership. Exceptions exist, however, for assets used for
exemption. The taxable estate is transfers (i.e., the estate
hedging transactions and for working capital. The
plus lifetime gifts) minus transfers to a spouse, charitable
remaining assets would be valued under the standard rules
transfers, certain estate tax costs, and the exemption. (A
(i.e., the price paid between a willing buyer and a willing
separate annual gift exclusion for each donee is set at
seller).
$15,000 in 2021.) The estate tax exemption was set at $5
million in 2011, adjusted for inflation. The TCJA doubled
The JCT estimates this provision to raise $19.9 billion for
that exemption for 2018-2025; with inflation adjustments,
FY2022-FY2031.
the exemption is $11.7 million in 2021. The surviving
spouse inherits any unused exemption, which simplifies the
Grantor Trusts
choice of leaving estates to the surviving spouse, because it
In a grantor trust, the income tax system treats an individual
preserves the exemption for future beneficiaries.
as owner. However, the estate and gift tax treats the trust
and the individual as separate persons. Grantor trusts can be
The BBBA would restore the exemption to pre-TCJA levels
used to transfer assets out of the individual’s estate.
for 2022 and after, reducing the current exemption by half
for 2022-2025. The Joint Committee on Taxation (JCT)
For income tax purposes, the grantor and the trust are
estimates this provision to raise $54.3 billion for FY2022-
treated as a unit, so that transactions between them are
FY2031. Most of the revenue gain would be in the first five
disregarded. Grantor trusts can be designed so that the
fiscal years because the exemption is scheduled to revert to
earnings of the trust flow through to the grantor and the
the lower level after 2025.
grantor pays the income taxes . Because these taxes are not
considered gifts to the trust, the earnings in the trust can
Increasing the Dollar Limit on Discounts grow tax free.
for Businesses Reflecting Value in Use
The tax code allows businesses to value their assets at use
For estate and gift tax purposes, the trust’s assets are
as a farm or business rather than market value. This
separate from the individual so that distributions to
provision is particularly beneficial to farms and allows a
beneficiaries are not treated as gifts under the gift tax and
reduction in the estate value of up to $1 million, adjusted
the trust’s assets are not included in the estate. One
for inflation ($1.19 million in 2021). It means, for example,
technique to transfer assets into the trust is to sell an
that the value of the farm will be what it could be sold for if
appreciated asset to the trust in exchange for a low-interest
restricted to farm use rather than to be subdivided for
promissory note. No capital gain will be realized on the
development. Heirs are required to continue use of the
transfer and no income tax paid on the interest payments. A
assets as a farm or business for 10 years.
grantor may also swap assets of equal value, which can be
beneficial for tax purposes if high-basis assets (which
The proposal would increase the dollar limit on the
would yield lower capital gains if sold by the trust to a third
reduction to $11.7 million. The JCT estimates this provision
party) are exchanged for low-basis assets, which will not be
to cost $0.3 billion for FY2022-FY2031.
subject to capital gains tax at death.
Minority Discounts
The BBBA would treat the transfer of property between the
Whereas cash and readily marketable securities can be
grantor and the trust as a taxable event, so that gain would
easily valued for estate tax purpose, assets held in private
be recognized on transactions (losses would not be
companies are more difficult to value. Estates can claim
recognized). The revision would also include the trust in the
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Tax Changes for Estates and Trusts in the Build Back Better Act (BBBA)
taxable estate and any distributions made by the trust to the
Not Included: Taxation of Gains at Death
beneficiaries would be treated as a gift made by the grantor
Unrealized capital gains passed on at death are never
and thus subject to gift tax rules. This provision would
subject to tax because the heir takes the basis (the amount
apply to grantor trusts other than revocable trusts (revocable
deducted on sale) as the value at time of death. This
trusts are included in the estate) but would be
provision is called stepped-up basis. The Biden
grandfathered, so that only contributions and transactions
Administration proposals included a provision to tax capital
with the trust going forward would be covered and included
gains at death. The BBBA did not include a provision to tax
in the estate.
capital gains at death or to impose a carryover basis in
which the heir takes the basis of the decedent.
These provisions would apply to all irrevocable grantor
trusts, including Grantor Retained Annuity Trusts,
For background on the estate tax, see CRS Report R42959,
insurance trusts, and spousal lifetime access trusts (i.e.,
Recent Changes in the Estate and Gift Tax Provisions, by
trusts allowing lifetime benefits for spouses).
Jane G. Gravelle. For background on the treatment of
capital gains at death, see CRS In Focus IF11812, Tax
The JCT estimates these provisions to raise $7.9 billion for
Treatment of Capital Gains at Death, by Jane G. Gravelle.
FY2022-FY2031.
Jane G. Gravelle, Senior Specialist in Economic Policy
IF11954

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Tax Changes for Estates and Trusts in the Build Back Better Act (BBBA)

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