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    • International estate planning, including planning for foreign persons who have U.S. situs assets and planning for families with mixed citizenship and residency status and/or ownership of assets in multiple jurisdictions.
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    Administering an estate is a complicated, time-intensive process. There are many pitfalls to avoid. Jacqueline helps clients navigate estate administration—with a focus on efficiency, clarity, and legal protection.

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    • Ms. Yu has unique experience advising trustees and personal representatives with complex international estates.
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    Jacqueline D. Yu provides Southern California-based estate planning services with an international focus.

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Status of Build Back Better Act and the Landscape of 2022 Estate and Gift Tax Laws

March 30, 2022 - Estate Planning

washington dc policy

History and Status of the Build Back Better Act

The Build Back Better Act is a bill introduced in the 117th Congress to fulfill aspects of President Biden’s Build Back Better Plan. It was spun off from the American Jobs Plan, alongside the Infrastructure Investment and Jobs Act, as a $3.5 trillion Democratic reconciliation package that included provisions related to climate change and social policy. Following negotiations, the price was lowered to approximately $2.2 trillion. The bill was passed 220–213 by the House of Representatives on November 19, 2021. However, during negotiations and parliamentary procedures, Senator Joe Manchin pulled his support from the bill. Since a bill such as this needs all 50 Democratic senators to pass, it was dead in the water.

On January 19, 2022, President Biden acknowledged that it would be better to pass “big chunks” of the bill and try to negotiate other areas later. On January 20, Speaker of the House Nancy Pelosi said the bill could be scaled down and rebranded to continue negotiations. Later in the day, several House Democrats said they would only support a bill if it included an increase to the State and Local Tax (SALT) cap.

As of this writing, the Build Back Better Act remains in limbo. Here we will discuss the details of proposed sections within the bill, what they could mean for you, and the estate planning tasks you can tackle to prepare for the potential passing of the bill.

How Federal Gift, Estate, and GST Tax Figures Are Affected by Inflation

Currently, the inflation rate in the U.S. is at its highest level since 1990. This is mainly due to the economy recovering from the pandemic recession and dealing with temporary shortages of supplies and workers, as well as shipping delays.

Federal estate, gift, and generation-skipping transfer (GST) taxes are affected by inflation when the IRS makes adjustments around it. Here are the adjustments to be aware of and how they might affect you.

For 2022, the IRS announced that the annual gift tax exclusion amount has been increased from $15,000 to $16,000 per recipient, or $32,000 for married couples. This adjustment applies to an outright gift to the recipient or a gift to a trust from which the beneficiary can withdraw the property. These gifts are called “present interests”. 

The IRS also announced the annual inflation adjustment for the federal gift, estate, and GST tax exemption, which increases the amount sheltered from taxes from $11,700,000 in 2021 to $12,060,000 as of January 1, 2022. For 2022, the gift, estate, and GST tax rate remains at a flat 40% for taxable transfers that exceed the transferor’s available exemption.

If your spouse is not a citizen of the United States, the amount you can gift to them annually during your lifetime has increased from $159,000 to $164,000.

The exemption is scheduled to sunset on December 31, 2025 to $5 million indexed for inflation, or about $6 million. 

Contribution Limits for IRA and 401(k) Plans

The current law lets taxpayers make Individual Retirement Account (IRA) contributions regardless of the account size. However, the legislation in the Build Back Better Act would prohibit contributions to a Roth or traditional IRA if the total value of the combined retirement accounts (including workplace plans) exceeds $10 million.

Regarding 401(k) plans, the legislation would prohibit any after-tax contributions in 401(k) and other workplace plans and IRAs from being converted to Roth savings.

Individuals would be unable to convert pre-tax savings to Roth savings in IRAs and workplace retirement plans if their taxable income exceeds $400,000 (single individuals), $450,000 (married couples), or $425,000 (heads of household). This would begin after December 31, 2021.

These proposals are aimed at restricting the use of 401(k) plans and IRAs as potential tax shelters.

Transfer Taxes and Income Taxes

There were proposals either omitted or dropped from the provisions of the Build Back Better Act as it made its way through the House of Representatives. This included plans to substantially change the tax characterization and treatment of trusts, and transactions with trusts and of transfer by gift and at death. There was a broad theme of moving toward more coordination between transfer taxes and income taxes. For example, if a trust is still subject to income tax payable by the grantor, it should not be treated as a completed gift. Also, if a transaction is subject to transfer tax it should be subject to income tax, etc.

What This Means for You

While these proposals were omitted, it is still important to monitor them because it is possible they could be embraced in the future either as targeted policy-driven reform, or a revenue-raising opportunity.

Deemed Realization

Deemed Realization occurs when a gift is complete for gift tax purposes. A decedent’s gross estate includes assets for estate tax purposes, and trust assets are subject to a taxable distribution or taxable termination for GST tax purposes.

The Build Back Better Act proposes to:

  • Tax deemed realization of accumulated appreciation upon transfers by gift and at death
  • Increase top marginal individual income tax rate to 39.6%
  • Tax capital gains at the same rate as ordinary income for taxpayers with adjusted gross income greater than $1 million

The reasons for these proposals are to:

  • Reduce the rate disparity between capital and labor income
  • Remove the encouragement of economically wasteful efforts to convert labor income into capital income
  • Eliminate the incentive for the taxpayer to inefficiently lock in portfolios of assets and hold them primarily for the purpose of avoiding capital gains tax on the appreciation
  • Raise revenue

Realization Events, Exclusions, and Valuation

Realization Events: Gains would be explicitly realized on transfers by gift or at death, equal to the excess of an asset’s fair market value over the donor’s or decedent’s basis in that asset. Losses at death would also be allowed to offset gains.

Exclusions: The proposal would exclude from tax “tangible personal property such as household furnishings and personal effects, transfers by a decedent to a US spouse”, and transfers to charity. Additionally, there would be a single unified exclusion of $1 million per person of capital gains for transfers both by gift and at death.

Valuation: A transfer generally “would be valued using the methodologies used for gift or estate tax purposes. However, a transferred partial interest would be its proportional share of the fair market value of the entire property.

While these events, exclusions, and valuations would have taken place on January 1 if the bill was in place, they will apply to pre-2022 appreciation.

Special Rules for Trusts and Entities

The Greenbook (a comprehensive guide for financial institutions that receive ACH payments from and send payments to the federal government) provides that recognition events would include transfers into, and distributions in kind from, a trust, unless the trust is a grantor trust deemed wholly owned and revocable by “the donor”.

Apparently, this would apply to distributions of appreciated assets to both current and successive or remainder beneficiaries of a pre-2022 Grantor Retained Annuity Trust (GRAT). Additionally, the rules would also apply to a “partnership” or “other non-corporate entity”.

Deferral of Tax

The Greenbook echoes the Obama Administration’s Fiscal Year 2016 and 2017 proposals that “payment of tax on the appreciation of certain family-owned and operated businesses would not be due until the interest in the business is sold or the business ceases to be family-owned and operated”.


While the Treasury has authority to issue any regulations necessary to implement the proposals of the Build Back Better Act, they acknowledge the difficulties of a proposal without a “fresh start” (meaning it would apply to pre-2022 appreciation). They say the regulations will include “rules and safe harbors for determining the basis of assets in cases where complete records are unavailable”.

Linking Grantor Trust Rules and Transfer Tax Rules

The Ways and Means Committee bill included a new section linking the grantor trust rules and the transfer tax rules. A trust designed as a grantor trust would continue to be exposed to gift or estate tax with respect to the grantor. This means the disappearance of one of the chief benefits of a grantor trust: the ability to shelter from estate tax its future growth in value, including growth from the grantor’s payment of income tax on its income.

Transfer of Property Between a Trust and Owner

The Ways and Means Committee bill would also have added a new section providing, “in the case of any transfer of property between a trust and a deemed owner of the trust, such treatment of the person as the owner of the trust shall be disregarded in determining whether the transfer is a sale or exchange for purposes of this chapter”. 

What This Means for You

This means that a gain would be recognized by the deemed owner or by the trust, or possibly both. The new rule would not apply to a trust that is fully revocable by the deemed owner, instead it would apparently apply only to a trust created, and any portion of an existing trust attributable to a contribution made, on or after the date of enactment. It is stated that it “is intended to be effective for sales and other disposition after the date of enactment. In a GRAT created before the date of enactment this would cause gain to be recognized through an in-kind distribution to the grantor.

Valuation of Nonbusiness Assets in an Entity

The Ways and Means Committee bill would have used a look-through method to require the valuation of nonbusiness assets in an entity. The proposal would add a new section referring to application to transfer after the date of enactment. This section would provide, “in the case of the transfer of any interest in an entity other than an interest which is actively traded, the value of any nonbusiness assets held by the entity with respect to such interest shall be determined as if the transferor had transferred such assets directly to the transferee”.

What This Means for You

There is a part of this proposal that has the potential for a harsher impact on family businesses. This proposal is similar to the Reagan and Clinton Administration’s For the 99.5 Percent Act. That act included a detailed list of what are considered “passive assets” that might be used in business, and “look-through rules” for entities that are at least 10% owned by another entity. Unlike the For the 99.5 Percent Act though, this proposal does not include a general prohibition on “minority discounts” in family owned or controlled entities, a prohibition that in the For the 99.5 Percent Act is not limited to “nonbusiness” entities or assets.

Basic Exclusion Amount and Anti-Clawback

Unlike the far-reaching and complex proposals discussed above, the Build Back Better Act would have accelerated the “sunset” of the doubling of the $5,000,000 basic exclusion amount that had been provided for in the 2017 Tax Cuts and Jobs Act.

Anti-clawback regulation was proposed in November 2018 and finalized in November 2019. The anti-clawback regulation confirms that individuals taking advantage of the increased gift and estate tax exemption amount in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion sunsets to pre 2017 Tax Cuts and Jobs Act levels. 

What This Means for You

Example: If an individual presently made a $9 million post-1976 taxable gift, which is sheltered from the current $12,060,000 estate and gift tax exemption amount, and the individual dies after 2025, when the estate and gift tax exemption amount sunsets to approximately $6 million, the anti-clawback rule allows the applicable credit amount against the estate tax to be based on the $9 million estate and gift tax exclusion amount used.

Increased Income Tax Rates for Trusts and Estates

When we look at the September 2021 version of the Build Back Better Act, it would have reinstated the 39.6% top individual income tax rate, suspended for eight years by the 2017 Tax Cuts and Jobs Act, on January 1, 2022. This is for taxable incomes over $400,000 and $13,450 for trusts and estates.

Surcharge to Modified Adjusted Gross Income

A 3% “surcharge” to modified adjusted gross income over $5 million for individual returns, including joint returns of married couples, would be applied through a new section in the plan. For trusts and estates, the threshold is $100,000.

New Surtax on Multi-millionaires and Billionaires

In the October 2021 White House document called the Build Back Better Framework, it was noted that its spending proposals would be “more than fully paid for by asking the wealthiest Americans and most profitable corporations to pay their fair share”, including a “new surtax on multi-millionaires and billionaires”.

Income Tax Increase for Some Trusts

The House Rules Committee released a new version showing that the threshold for imposition of the surcharge would be doubled to $10 million for individual returns, including joint returns of married couples, and $200,000 for trusts and estates. The rate of the surtax would be almost tripled, beginning at that threshold of 5% and then increasing to 8% at a level of $25 million for individual returns and joint returns, and $500,000 for trusts and estates.

Under the House-passed bill, what was a top rate of 37% for 2018 through 2025 would become 45%. This 45% rate would take effect at very high-income levels, $25 million for single individuals and married couples filing joint returns, but would apply to incomes above only $500,000 for trusts and estates.

With the 3.8% tax on net investment income the combined top rate under the House-passed bill would be 48.8%. The net investment income tax would be expanded under the bill passed by the House, beginning January 1, 2022, by effectively eliminating the “trade or business” exception for an individual with “modified adjusted gross income” over $400,000 and for trusts and estates with adjusted gross income in excess of the threshold for the highest income tax bracket for trusts and estates.

Recommendations and Preparation

In this section we will share potential estate planning techniques. 

Challenge: Special Income Tax Surcharges May Impact Trusts

Something to take into account is the special income tax surcharges that may impact many trusts. On income above $10 million there is an additional tax of 5%, and if income exceeds $25 million the additional surtax is 3%. The 5% surtax will apply to trust income at a mere $200,000 of income.

This will change how common trusts are handled. It appears that grantor trusts will remain so they will be taxed to the settlor (or other person who is deemed the grantor for income tax purposes). However, non-grantor trusts typically pay their own taxes and will have to be carefully monitored. A non-grantor trust pays tax on all income it earned, but it receives a deduction for the income which is distributed to beneficiaries.

Solution: Permit Trusts to Make Charitable Contributions

It may be more beneficial to permit trusts to make charitable contributions. However, in order to qualify for an unlimited charitable contribution deduction, the contribution must be made from gross income of the trust. Additionally, the IRS requires that the trust has the requisite language that permits contributions, in its original governing instrument, not a modified version.

If a trust document does not allow for charitable contributions, it may be possible for a trust to contribute assets to a partnership that then invests and gives charitable contributions. It appears the IRS respects this type of deduction. In the near future, charities will be more commonly named in trusts.

Solution: Maintain Grantor Trust Status

To avoid the harsh trust income tax surtax, it would be advantageous for trusts to maintain grantor trust status.

Solution: Shift Income in Non-Grantor Trusts

In the case of non-grantor trusts, income could be shifted from the trust level to beneficiaries at lower tax brackets. Non-grantor trusts may face the surtax and a concerted effort should be made to review their tax status before the end of the year. You can have your wealth advisor evaluate trust gains and income, your CPA evaluate the tax status, and have the trustee consider if distributions could be made.

To avoid the new high surtax rates consider including a wider class of beneficiaries when planning and drafting trusts so that the trustee has more flexibility to distribute income to multiple beneficiaries in lower income tax brackets.

A word of caution: the trustee will have to consider whether the beneficiaries face any claims or lawsuits before any distributions are made. If claims or lawsuits exist, it could result in an ex-spouse or creditor attaching the larger distributions that income tax changes might spur. Additionally, consider the beneficiary’s personal income tax; if they are in the maximum income tax bracket a distribution may have no beneficial effects. Or, if the beneficiary resides in a high tax state like California, the increase in state income taxation from a distribution may outweigh the federal income tax benefits.

Lastly, if a trust has certain income, such as capital gains income, taxed to the current beneficiaries rather than the trust, one of two things will need to happen. The trust instrument will have to permit that income is taxed to the beneficiaries, or the trustee may have to take actions to achieve that result. Often, it is possible to decant a trust into a new trust with different provisions.

Challenge: Harsh Estate Tax Proposals


  • Convert an Irrevocable Life Insurance Trust (ILIT) into a Spousal Lifetime Access Trust (SLAT).
  • Create a financial forecast to identify just how much you could transfer and still support your lifestyle without access to trust assets.
  • Create a robust insurance plan to pursue planning in 2022. Examine your life insurance to address mortality risk of your spouse in a non-reciprocal SLAT, adequate liability, long term care coverage, and disability coverage. This helps support that you are not making a fraudulent conveyance and that you will have adequate resources after the transfer.
  • Use available exemption now before reduction in estate taxes. Plan to reduce your estates before tax laws become harsher.

Challenge: Effectively Setting Up a SLAT or DAPT


During the uncertain times of 2020 and 2021, SLATs became quite popular. At its most basic, a SLAT is a gift from one spouse (the donor spouse) to an irrevocable trust for the benefit of the other spouse (the beneficiary spouse). A SLAT is funded by gift while both spouses are alive. The beneficiary spouse can receive distributions from the SLAT, yet the SLAT is designed to be excluded from the beneficiary spouse’s gross estate and to not be subject to estate tax when the beneficiary spouse dies. To prevent the value of the assets of the SLAT from being included in the beneficiary spouse’s gross estate, the SLAT will not qualify for the gift tax marital deduction (either because the donor does not make the necessary election or the terms of the trust prevent it from qualifying). This allows the donor spouse’s exemption from the gift and estate tax to be applied to the value of the assets transferred to the SLAT, sheltering the transfer from gift tax. When setting up a SLAT, consider the following:

  • The donor spouse should not be a trustee of the SLAT.
  • If the beneficiary is trustee of a SLAT, distributions should be mandatory or subject to an ascertainable standard (for example, for purposes limited to health, education, maintenance and support). If distributions are made for purposes beyond an ascertainable standard, a non-beneficiary Trustee (or a Special Trustee) must exercise these discretionary distributions for purposes other than health, education, maintenance and support.
  • An ascertainable standard restricts distributions from the SLAT to providing for a beneficiary’s health, education, maintenance, and support. These are measurable amounts and can be enforced by the court having jurisdiction over the SLAT.
  • Of course, to the extent the beneficiary spouse has the right to receive income or principal from the SLAT, the beneficiary spouse’s creditors may be able to attach those assets.

Learn how a SLAT preserves wealth and creates asset protection


While SLATs remain a useful tool, you may want to consider a DAPT, also called a self-settled trust. This is a way to safeguard and preserve the estate and gift tax exemption in case future changes reduce it from current high levels. Note: In 2026 it is scheduled to be reduced by half. A DAPT may allow you to be a beneficiary of a trust yet remove those assets from your estate. It also provides asset protection for the assets held in a DAPT. It should be noted that some states do not permit this type of trust for asset protection purposes. California is one of these states. A good alternative in California is a SLAT, which provides both asset protection and exclusion of assets from the grantor’s gross estate as well as the grantor spouse’s estate. Though the beneficiary of a SLAT is the grantor’s spouse and not the grantor (and therefore, it is not a self-settled trust), the grantor may continue to indirectly benefit from the SLAT’s assets through the beneficiary spouse.

Challenge: Estate Planning was Rushed During the Early Pandemic

Solution: Restructuring and Implementing Estate Plans Correctly

The years 2020 and 2021 saw many people completing estate planning in a compressed time frame. Now is the time, prior to the Build Back Better Act going into effect, to re-evaluate and perhaps restructure your estate. It is critical that it is done correctly, according to all operating agreement restrictions, to avoid costly tax penalties.

Estate planning formalities that are often overlooked:

  • Respect of entities and trusts. Adhere to the formalities of the operating agreement restrictions.
  • Actual dates of execution of documents. Legal documents should indicate the date they were actually signed, even if there is a different effective date.
  • Value of assets transferred. Avoid having a gift, and a gift to trust, be identical.
  • Tax returns should reflect the transaction
  • Tax principles: substance over form. The substance of a transaction, rather than the form in which it is cast, determines the tax consequences.
  • Related party transactions. Courts view family transactions with scrutiny, due to the opportunity for deception.
  • Marital deduction does not supersede substance over form

Summary and Takeaways

It is an interesting, and quite frankly–unnerving–time for estate planning as no one wants to be caught unprepared by significant federal changes to estate and gift tax laws, yet we don’t know when those changes might materialize. It is prudent to be proactive and plan to protect your estate now because the proposals for changes were substantial. Therefore, we advise to appropriately plan as best as possible to address income tax and estate planning strategies.

For further information on estate and tax planning, contact The Law Offices of Jacqueline D. Yu at [email protected] and (310) 313-1195.