Impact of Tax Proposals on Ways and Means of Home for Trusts, Estates and Retirement Accounts | Bowditch & Dewey



In this second blog post on the House Ways and Means Tax Proposals, we discuss the proposed changes that will affect the taxation of trusts, estates and pensions. As we discussed, on September 13, 2021, the Congressional House Ways and Means Committee presented more than 880 pages of legislative tax proposals to help fund the House’s proposed $ 3.5 trillion stimulus package. Below is a summary of the proposals for the taxation of trusts, estates and pension assets.

  1. Trusts and estates with taxable income over $ 12,500 (adjusted for inflation) would be taxed at a rate of 39.6%, rather than the current rate of 37%.
  2. Trusts and estates would also be taxed on capital gains at a maximum rate of 25% instead of the current 20% rate on capital gains.
  3. Trusts and estates with an Adjusted Gross Income (“AGI”) greater than $ 100,000 would be subject to a 3% surtax on their income. High net worth individuals would be subject to this additional 3% AGI tax greater than $ 5 million (for joint filing) or $ 2.5 million (for single or married taxpayers filing separately). The surtax would not apply to a trust if the interest in the trust benefits charities.
  4. The federal inheritance tax exemption would drop to $ 5 million in 2010 (increased for inflation each year thereafter) from its current $ 11.7 million. The write-down for an eligible building used on a family farm would drop from $ 750,000 to $ 11,700,000.
  5. Unlike current law, an intentionally defective grantor’s trust would be treated as part of the grantor’s taxable estate for estate tax purposes. In addition, sales between these grantor trusts and their owners would be treated as sales to third parties for income tax purposes. However, no loss could be recognized on these sales between related parties. Currently, a sale between a grantor trust and its owner is not considered for income tax purposes.
  6. Appraisal discounts for lack of market value or for minority interest would not apply to the transfer of non-commercial assets. Currently, the IRS and the courts allow these rebates to the fair market value of the property for gift tax purposes.
  7. Taxpayers with IRA or 401k (or other employer contribution plan) assets greater than $ 10,000,000 would no longer be able to contribute to their traditional Roth or IRA, if their AGI exceeds $ 450,000 (for married taxpayers reporting jointly) or $ 400,000 (for single taxpayers). In addition, taxpayers whose IRA and employer contribution plan balances exceed $ 10,000,000 should receive minimum distributions the following year, if the taxpayer’s AGI exceeds $ 450,000 (for taxpayers married declaring jointly) or $ 400,000 (for single taxpayers). This minimum distribution would be 50% of the balance in excess of $ 10,000,000. Taxpayers with retirement account balances greater than $ 20,000,000 should also distribute the lesser of (a) the amount necessary to bring the total balance of all accounts to $ 20 million, or (b) their total balances in Roth IRA or Roth 401k / employer contribution accounts.
  8. Employers should report balances greater than $ 2.5 million to the IRS 401 (k).
  9. Taxpayers with an AGI of $ 400,000 or more (or $ 450,000 or more in the case of married taxpayers filing jointly) would no longer be able to convert tax-deferred IRA or 401k account balances into Roth IRA accounts. Additionally, taxpayers couldn’t convert after-tax contributions made to qualifying plans (like a 401k) into Roth IRA accounts. Currently, taxpayers can convert these tax-deferred IRA or 401k accounts to Roth IRA accounts by paying income tax on the value of the converted 401 (k) or IRA balance at the time of its conversion.
  10. Taxpayers would no longer be able to use IRA assets to invest in private securities offered only to accredited investors. IRAs holding such investments would lose their IRA status. There would be a two-year transition period for IRAs holding these investments.
  11. Taxpayers would no longer be able to invest IRA assets in an unlisted entity if the taxpayer owns 10% or more of the entity or is an officer or director of that entity. If the taxpayer does so, the IRA will cease to be an IRA. Currently, an IRA owner cannot invest in an unlisted entity if the taxpayer owns more than 50% of the entity. A two-year transition period for IRAs holding such investments would also apply to this proposal.
  12. Charitable contributions by a partnership in a conservation easement transaction would no longer be considered tax deductible if the amount the partnership contributes is greater than 2.5 times the sum of the relevant base of each partner in the partnership (for example, their base in the real estate involved in the easement transaction). Penalties related to the 40% accuracy of the underpayment of tax would apply to such transactions and no reasonable cause defense would be permitted. In addition, the requirement for oversight approval of a penalty assessment would no longer apply to these transactions. The proposal would be effective for contributions paid after December 23, 2016 or after December 23, 2018 (for contributions aimed at preserving a certified historical structure).

    Currently, taxpayers can claim a tax deduction for the contribution of a qualifying real estate interest (such as land of public interest or property of historical significance) to a qualifying organization (such as a purpose-built organization). non-profit for conservation purposes). A higher contribution limit is also allowed in the calculation of the charitable tax deduction for these conservation easements.

    The IRS, however, issued Notice 2017-10 to designate certain syndicated conservation easement transactions as listed transactions. These transactions involved deductions for charitable donations that were considerably higher than the amount invested by the taxpayer.

The House has not yet voted on the legislation proposed above. If passed, the increased tax cost of holding assets in trust means that trustees must review how often they distribute trust assets to beneficiaries in order to minimize overall taxation. In addition, private funds that have investors who invest their IRA assets in such funds could be significantly affected. Please consult your tax advisor if you have any questions about any of the above proposals.



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