Even passive news watchers have likely heard about the new legislation known as the Build Back Better Act. If passed, this new $3.5 trillion BBB Act will change the Tax Code, which will affect estate planning. Though, as it has not passed, we do not know which changes will actually go into effect.
The Tax Cuts and Jobs Act, which passed in 2017, doubled the transfer tax exemption to $10 million (adjusted for inflation). This means the generation skipping transfer tax, gift tax and estate tax exemptions were raised to nearly $12 million per person. But, this exemption was set to expire in 2026, reducing the exemptions to $5 million per person. The BBB Act changes this to 2022. This means that planned transfers to trusts will need to take place much sooner to avoid higher taxes.
Often, people transfer hard to value assets, like non-publicly traded stock, into funds or trusts to have them appraised at their lowest defensible valuation. The BBB Act eliminates this option for family entities that are funded by marketable securities. This is because the BBB Act creates a two-step asset valuation process when the entity is transferred. Non-business assets owned by the entity are no longer allowed a valuation discount. The second process is the traditional “willing buyer-willing seller analysis,” which would begin for all transfers after the BBB Act goes into effect.
This may sound complicated, but it is fairly straight forward. For example, take a LLC manufacturer that also owns $3 million of any publicly traded stock. A 33% gift of that LLC’s stock to a child is valued as 33% of that stock ($1 million), as well as 33% of the LLC, valued without that publicly available stock.
Estate planning can get complicated, especially when new legislation is planned. Estate planning attorneys recommend yearly estate planning updates. Now that we have some legislative language to work with, attorneys can begin helping clients to plan for if it passes.