News and Commentary

Government Spending Bill Takes Aim at Common Estate-Planning Strategies By Eric P. Zeitlin

The House Budget Committee voted on September 25 to approve a proposed $3.5 trillion spending and tax bill to support the president’s economic agenda. As expected, the draft legislation includes provisions calling for higher taxes on the wealthy. However, it also includes a series of measures that would essentially nullify the benefits of some estate-planning strategies commonly used by high-net-worth individuals to protect wealth, minimize tax liabilities and, in some cases, eliminate tax burdens. While it is unknown which specific provisions the president will ultimately sign into law, taxpayers should take the time now to meet with their advisors, review existing strategies and make modification as needed.

Expected Tax Changes

The spending package calls for the top ordinary income tax rate to increase from 37 percent for individuals earning more than $523,600 (and $628,300 for married couples filing jointly) to 39.6 percent for individuals earning more than $400,000, married couples making more than $450,000, and trusts and estates with taxable income above $12,500. The current 3.8 percent net investment income tax (NIIT) would apply to taxpayers with more than $400,000 in taxable income (or $500,000 for joint filers) and would include the net investment income taxpayers derive in the ordinary course of a trade or business, including pass-through business income.

Under the current language of the proposal, long-term capital gains would be taxed at a top rate of 25 percent, plus the additional 3.8 percent NIIT, effective Sept. 13, 2021. Taxpayers with investment gains and losses that resulted from transactions initiated before this effective date would be permitted to apply the current tax rate of 20 percent.

Finally, the plan calls for the current federal estate tax exemptions of $11.7 million for individuals and $23.4 million for married couples to expire in Jan. 1, 2022, four years earlier than planned. At that point, the exemptions would revert to their pre-2018 levels of $5 million for individuals and $10.10 million for married couples filing jointly, adjusted for inflation. Estates and gifts exceeding these thresholds would continue to be taxed at 40 percent.

Unexpected Tax Changes

New Surcharge on Wealthy Individuals, Trusts and Estates

Wealthy taxpayers and trusts and estates would be subject to a 3 percent surcharge on modified adjusted gross income (MAGI) that exceeds $5 million.

New Restrictions for Grantor Trusts

Sales between grantor trusts and their deemed owners would be treated as taxable third-party sales, thereby eliminating the benefits of using grantor retained annuity trusts (GRATs) and intentionally defective grantor trusts (IDGTs) to freeze estates. By contrast, current law allows individuals to establish grantor trusts and sell or exchange assets with the trust without any income tax implications, while also allowing grantors to exclude trust property from their taxable estates at the time of their deaths.

Under the proposal, when a decedent is a deemed owner of a grantor trust for income tax purposes, those trust assets would be treated as part of his or her estate, subject to estate tax and capital gains tax on asset appreciation. If the trust’s grantor status is terminated during the grantor’s lifetime, the assets will be treated as being gifted at that time by the grantor. A “proper adjustment” will be made if assets of a grantor trust are included in the grantor’s taxable estate to account for amounts previously treated as taxable gifts by the grantor to the trust.

Based on the language of the proposed bill, these changes would apply to trusts created and funded on or after the date of enactment, as well as to trust contributions made after that date.  On a grander scale, this provision could also apply to other tax-advantaged trusts, including grantor retained annuity trusts (GRATs), spousal lifetime access trusts (SLATs), and irrevocable life insurance trusts (ILITs).

New Restrictions to Retirement Accounts

Individuals with taxable income of more than $400,000 (or $450,000 for married couples filing joint tax returns) would be prohibited from making additional, excess contributions to traditional IRAs and Roth IRAs when the balance of their combined retirement accounts (including 401(k)s) at the end of the previous year exceeded $10 million. Moreover, the proposed law calls for these high-income taxpayers, regardless of their age, to take from their retirement plans a required minimum distribution (RMD) equal to 50 percent of the account balance that exceeds $10 million. These provisions would eliminate the use of backdoor Roths and Roth IRA conversions beginning in tax year 2032.

New Limitations to Valuation Discounts

Under the proposal, valuation discounts for lack of control would no longer apply to most passive, nonbusiness assets transferred to a limited liability company (LLC) or other entity for the benefit of heirs.

Limited Benefits of the QBI Deduction for Pass-Through Businesses

The proposal would introduce a cap to the Section 199A qualified business income (QBI) deduction introduced by the TCJA for taxpayers who own interests in pass-through entities. For individual taxpayers, the maximum allowable deduction would be limited to $400,000, or $500,000 for married couples filing joint tax returns and $10,000 for trusts and estates.

The House bill lays the groundwork for tax reform, giving taxpayers a warning of some of the changes that are likely to become the law at the end of this year and potentially earlier. Although the future is unknown, now is the time to begin preparing.

About the Author: Eric P. Zeitlin is CEO and managing director of Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with Raymond James Financial Services. For more information, call (954) 712-8888 or email

Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888. Eric P. Zeitlin is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC.

Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors + CPAs. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.

This material is being provided for information purposes only. It is not a complete description of the developments referred to in this material nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Investments mentioned may not be suitable for all investors. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Any opinions are those of PWA and not necessarily those of Raymond James. You should discuss any tax or legal matters with the appropriate professional. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Investments mentioned may not be suitable for all investors.

Under current law, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Please note, changes in tax laws may occur at any time and could have a substantial impact on each person’s situation. While we are familiar with the tax provisions presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

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Posted October 6, 2021