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1 1 (October 22, 2021)

handle is hein.crs/goveerp0001 and id is 1 raw text is: $$ h hi~ ~ October22, 2021 Tax Changes for Estates and Trusts in the Build Back Better Act (BBBA) The Build Back Better Act (BBBA; H.R 5376) would revise the estate and gift taxand treatment of trusts. It would eliminate the temporary increase in exemptions enactedin the TaxCuts and Jobs Act (TCJA; P.L. 115-97), increase the limits on certain discounts of value for businesses to reflect use rather thanmarket value, eliminate minority discounts forcash and readily marketable securities, and revise the rules for grantor trusts. Changes in the Estate and Gift Tax Exemption The estate and gift taxapplies on a unified basis onlifetime gifts plus the estate at a 40% rate after deducting an exemption. The taxable estateis transfers (i.e., the estate plus lifetime gifts) minus transfers to a spouse, charitable transfers, certainestate taxcosts, and theexemption. (A separate annualgift exclusion for each donee is set at $15,000 in 2021.) The estate taxexemption was set at $5 million in 2011, adjusted for inflation. The TCJA doubled that exemption for 2018-2025; with inflation adjustments, the exemption is $11.7 million in 2021. The surviving spouse inherits anyunused exemption, which simplifies the choice ofleaving estates to the surviving spouse, because it preserves the exemption for future beneficiaries. The BBBA would restore the exemption to pre -TCJA levels for 2022 and after, reducing the current exemption by half for 2022-2025. The Joint Committee on Taxation (JCT) estimates this provision to raise $54.3 billion for FY2022- FY2031. Most of the revenue gain would be in the first five fis caly ears because the exemption is s cheduled to revert to the lower level after 2025. Increasing the Dollar Limit on Discounts for Businesses Reflecting Value in Use The tax code allows businesses to value their as sets at use as a farm orbusiness rather than market value. This provisionis particularly beneficialto farms and allows a reductionin the estate valueofup to $1 million, adjusted for inflation ($1.19 million in 2021). It means, for example, that the value of the farmwill be what it could be sold for if restricted to farmuse rather than to be subdivided for development. Heirs are required to continue use of the assets as a farmor business for 10 years. The proposal would increase the dollar limit on the reduction to $11.7 million. The JCT estimates this provision to cost $0.3 billion for FY2022-FY2031. Minority Discounts Whereas cash and readily marketable securities can be easily valued forestate taxpurpose, assets held in private companies are more difficult to value. Estates can claim https ://crs reports minority discounts when an heir receives a minority share in a company, and courts often allow significant discounts, even if disputedby the Internal Revenue Service. The rationale is that the individual does not have a controlling interest, which reduces the value of the assets. One practice used to reduce estate taxvalue is to transfer cash and marketable securities to a family firm with the heirs each receiving a minority share, leading to a discount on these amounts as well as the value of business assets. The BBBA would dis allow discounts for cash and readily marketable securities contained in a private corporation or partnership. Exceptions exist, however, for as sets used for hedging transactions and for working capital. The remaining assets wouldbe valued under the standardrules (i.e., the price paid between a willing buyer and a willing seller). The JCT estimates this provision to raise $19.9 billion for FY2022-FY2031. Grantor Trusts In a grantor trust, theincome taxsystemtreats an individual as owner. However, the estate and gift taxtreats the trust and the individualas separate persons. Grantor trusts can be used to transfer assets out ofthe individual's estate. For income tax purposes, the grantor and the trust are treated as a unit, so that transactions between themare disregarded. Grantor trusts canbe designed so that the earnings of the trust flow through to the grantor and the grantor pays the income taxes. Because these taxes are not considered gifts to the trust, the earnings in the trust can grow tax free. For estate and gift taxpurpo ses, the trust's assets are separate fromthe individual so that distributions to beneficiaries are nottreated as gifts under thegift taxand the trust's assets are not included in the estate. One technique to transfer assets into the trustis to sell an appreciated asset to the trust in exchange for a low-interest promis sory note. No capitalgain will be realized on the transfer andno income taxp aid on the interest payments. A grantor may also swap assets ofequalvalue, which canbe beneficial for taxpurpos es ifhigh-basis assets (which would yield lower capitalgains if sold by the trustto a thiid p arty) are exchanged for low-basis assets, which willnot be subject to capitalgains taxat death. The BBBA would treat the transfer of property between the grantor and the trust as a taxable event, s o th at gain would be recognized on transactions (los ses would not be recognized). The revision would also include the trust in the .conigress.gov I

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