Here is a more thorough analysis from the Joint Committee on Taxation report of the tax provisions in the Ways and Means Markup released Monday, September 13 relating to estate tax, capital gains, grantor trusts and valuation discounts:
With respect to the grantor trust and valuation provisions:
- All are effective “the date of enactment”. The new rules will apply to any trust created after the date of enactment, as well as to that portion of any trust established prior to the date of enactment that is attributable to a contribution made on or after the enactment date. Presumably, therefore, any established but as yet unfunded grantor trust is at risk if the funding does not occur until after the enactment date
- Goal is to more closely align income and transfer tax rules by imposing transfer tax on certain assets held in/distributed from grantor trusts.
- For any portion of a trust where grantor is deemed owner (using grantor trust rules under 671-679) , the gross estate of a deemed owner will include all assets attributable to that portion.
- Any distribution (other than to deemed owner or spouse) to one or more beneficiaries during deemed owner’s lifetime (other than discharge of obligation) treated as transfer for gift tax purposes.
- If deemed owner ceases to be treated as deemed owner during lifetime, assets treated as transferred for gift tax purposes at that time.
- Adjustments made for includable assets/gifts to account for amounts treated previously as gifts at time transfer made to trust.
- Transfer between trust and deemed owner – treatment as deemed owner of the trust disregarded in determining whether there is a sale or exchange for income tax purposes. Might result in realization and recognition of gain – amends section 267. Does not apply to any fully revocable trusts.
- Valuation rules – disallowance of any valuation discounts in transfers of nonbusiness assets. Non business = passive asset held for production or collection of income not used in active conduct of trade or business. If transfer of any interest in entity other than an interest that is actively traded (established financial market), the value of any nonbusiness assets determined as if transferred directly to transferee and not transferee and no valuation discount allowed. The value of such nonbusiness assets is disregarded when determining the value of the interest in the entity.
- Top rate moves to 25% from 20% effective the Introduction date – September 13, 2021
- 20% rate will continue to apply to completed transactions before 9/13 and the 25% rate for those later.
- Gains for a transaction completed after 9/13 will be treated as recognized before if the transaction was subject to a binding written contract entered into before 9/13 (unless the contract was modified in any material respect after 9/13).