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Tax Planning

October 04, 2021

Breaking News: Observations on the Proposed Federal Tax Changes Affecting Individuals

The potential government shutdown, a possible debt default, a $1 trillion infrastructure bill and the $3.5 trillion Build Back Better legislation have dominated the news from Washington the last two weeks. It is increasingly likely some Senate Democrats will not agree to a full $3.5 trillion funding over 10 years for Build Back Better, positioned as a “reconciliation bill,” and this has immediate implications for the tax changes coming down the road for individuals. Negotiations may proceed quickly if there is a breakthrough this week and legislation could happen quickly, but it seems more likely this will drag on for six weeks or more.

The scene in Washington

Negotiations continue among the Democrats, with Senator Joseph Manchin announcing he will not support a Build Back Better bill with 10-year spending greater than $1.5 trillion. Senator Kyrsten Sinema has expressed other objections, and no reconciliation bill can be expected to pass without the vote of both. While the final package is yet to be determined, a $1.5 trillion package would require far fewer tax increases than a $3.5 trillion package.

For a review of the House Ways and Means Committee tax proposals to raise the $3.5 trillion, the only available tax legislation to date, please reference the replay of the September 17 discussion by Glenmede Director of Wealth Strategy Lisa Whitcomb and Chief Investment Officer Jason Pride, available here. Most of the proposed changes affect only persons with income of more than $400,000 (or $450,000 for a married couple).

Where do we go from here?

We continue to believe it is more likely than not that many compromises will be made to allow a smaller Build Back Better plan, and some of its tax increases, to move forward. It is also increasingly likely some of the most significant and surprising proposed changes to taxes affecting wealthy individuals will not be part of the legislation. What are the most likely individual income tax proposals to be excluded from the final agreement? In our view, it will likely be those that are difficult to administer, are highly controversial or do not raise significant revenue, particularly:

  • the 3% surcharge on high income individuals, trusts and estates,
  • changes to the grantor trust rules which would align estate and income tax rules for grantor trusts (requiring inclusion of grantor trust assets in a grantor’s estate and taxing transactions between a grantor and a grantor trust),
  • imposition of capital gains tax on appreciated securities at death and
  • expansion of the 3.8% Net Investment Income tax to active income from a partnership, LLC or S corporation

If any legislation is passed, it is almost certain:

  • the top rate on ordinary income will rise to 39.6%,
  • the tax rate on capital gains and dividends for high income individuals will increase to 24-25% effective as of September 13, 2021,
  • partnership “carried interests” will be taxed more harshly and
  • the corporate tax rate will increase to 25%

Senator Manchin has already stated his endorsement of these four specific tax increases. We do not have any current insight into whether Senator Manchin would also endorse a reduction of the individual estate and gift tax exemption from $11.7 million to about $6 million on January 1, 2022.

What individuals should do

  • Individuals can continue to move forward with making gifts to use their full $11.7 million estate and gift tax exemption if their assets and asset structure make it possible, mindful that there is a small chance there could be changes to the grantor trust rules and the impact this would have on their planning.
  • Individuals should review any insurance trusts with their attorneys, accountants and/or insurance agents to determine whether the trusts are “grantor” trusts , the dollar value of any required future premium payments and what actions may be required to inoculate the insurance trust from inclusion in the grantor’s taxable estate. While we believe the changes proposed by the House Ways & Means Committee with respect to grantor trusts are now unlikely to be passed, the risk is not zero. The provisions would take effect on the date a Build Back Better bill is signed by President Biden, which likely will be sooner than January 1. Individuals may want to craft a plan to prefund future insurance premiums in case the grantor trust provisions do pass. If a loan will be necessary to do so, it is best to begin the process now.
  • Is the aggregate value of your traditional IRAs, Roth IRAs and 403(b) retirement plans greater than $10 million? If yes, work with your accountant to understand the distributions which may be required in 2022. Plan with 2021 income tax rates whether the best path forward might include additional distributions from a Roth IRA to you before the 2021 year-end.

Fast-paced change

As President Biden said this past week, a compromise agreement among the Democrats could be made in the next six minutes, six days or six weeks. We simply do not know. Most proposed changes, if agreed upon, will likely take effect on January 1, 2022. But certain provisions, most importantly changes to the grantor trust rules, are slated to be effective on the date a Build Back Better bill is signed by President Biden. Be prepared.



This presentation is intended to provide a review of issues or topics of possible interest to Glenmede Trust Company clients and friends and is not intended as investment, tax or legal advice. It contains Glenmede’s opinions, which may change after the date of publication. Information gathered from third-party sources is assumed reliable but is not guaranteed. No outcome, including performance or tax consequences, is guaranteed, due to various risks and uncertainties. Clients are encouraged to discuss anything they see here of interest with their tax advisor, attorney or Glenmede Relationship Manager.