Last-Minute Estate Tax Changes

Vawter Financial |

Advisors throughout the financial services industry, including financial planners, estate attorneys and tax consulting CPAs, all nervously watched the tax proposals that were working their way through Congress.  


Why nervous?  For one thing, at this late hour, it is very difficult to make plans or last-minute changes to mitigate any tax changes—like moving deductions and income from one tax year to another, and especially making estate planning decisions that would help people save their heirs from significant tax obligations. 


While the Infrastructure Investment and Jobs Act (IIJA) does generate some revenue through revisions that impact mostly employers, it does not contain the sweeping changes to the estate and gift tax laws that would have upended many estate plans.  Notably, the IIJA does not contain: 


  • A reduction in the federal estate tax exemption amount which would have dropped from $11.7 million per individual to somewhere around $6 million.    


  • Any alterations to the use of irrevocable trusts as gifting vehicles including irrevocable life insurance trusts and grantor trusts.  The latter is a popular remedy for reducing estate taxes, where a person or couple move some part of their net worth into a trust vehicle, taking it out of their estate, and still remain the owner of the assets in the trust for income tax purposes.  The grantor(s) pay taxes on the income generated in the trust, which gets even more money out of their estate and raises the value of the trust to the heirs—who are not having to pay those income tax obligations.  In addition, under current rules, if an asset appreciates inside the trust, the grantor who put that asset into the trust can buy it back out without tax consequences and hold it until death, creating a step-up in basis that would avoid capital gains taxes.  


  • Something to note with fully funding an irrevocable life insurance trust (ILIT).  Many ILIT’s are funded on a yearly basis using annual exclusion gifts for $15,000 (which increases to $16,000 in 2022).  However, fully funding an ILIT would use up your lifetime exemption instead of annual exclusion gifts. 


  • Any modification to the federal estate tax rate.  It continues to be 40%. 


  • The elimination of valuation discounts (such as a lack of control or lack of marketability) for closely held entities that hold nonbusiness assets such as cash, equity and certain types of real estate. 


The Build Back Better bill (BBB) passed in the House of Representatives on November 19, 2021 and is currently in the Senate.  The BBB does include some changes to income tax, such as additional taxes for large corporations and high-income individuals.  It also increases the state and local taxes (SALT) deductions from $10,000 to $80,000.  However, it does not include expansive remaking of the estate and gift tax laws that people were concerned about. 




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