Prepare Clients Now for Possible Trust, Estate and Gift Tax Changes  

AICPA’s director of tax policy and advocacy dissects the recent House tax proposal and shares concerns.

By Eileen Reichenberg Sherr

[Editor’s note: This article is part of a series we are running on the new tax proposals.]

On September 13, 2021, the House Ways and Means Committee Chair released proposed reconciliation legislation that included several trust, estate and gift tax changes. The committee also released a section by section summary, a list of the revenue provisions, the Joint Committee on Taxation (JCT) distributional analysis, JCT revenue estimates, and the JCT description of the revenue provisions. This article discusses the proposed tax changes, planning to consider with clients prior to possible enactment, and AICPA comments on some of these tax changes.

Estate and Gift Tax Changes Proposed

Reduced Estate and Gift Tax Exemption

 The proposed legislation would reduce the current $11.7 million per person estate and gift tax exemption — that was doubled as part of the Tax Cuts and Jobs Act of 2017 (TCJA) — back to its pre-TCJA $6.02 million per person exemption amount, indexed for inflation, starting in 2022. This rollback had previously been scheduled to occur in 2026. Practitioners with clients who want to take advantage of the higher exemption amount before the legislation may be enacted may want to consider suggesting gifting as soon as possible, or before the end of the year.

Grantor Trust Changes

The proposed legislation would make several changes to grantor trust rules that will become effective on the date of enactment. The changes will impact intentionally defective irrevocable trusts (IDITs). It will also affect qualified personal residence trusts, grantor retained annuity trusts, and charitable lead annuity trusts: Their remainder interests will be subject to gift tax, and the excess of the fair market value of the assets will be subject to income tax.

Regarding IDITs, the legislation requires the grantor’s estate to include any assets considered owned by a grantor trust and subjects the trust to estate tax. In addition, distributions from grantor trusts during the grantor’s lifetime generally would be treated as taxable gifts. If grantor trust status is terminated and the trust becomes a separate entity subject to tax, the grantor would be deemed to have made a taxable gift of the trust assets.

The legislation also provides that transfers of property between a grantor trust and anyone who is an owner of the trust would be treated as a sale or exchange and subject to income tax. However, sale or exchange treatment would not apply if the trust is fully revocable by the deemed owner.

As currently drafted, the proposed legislation grandfathers grantor trusts that were created and funded before the date of enactment. That means if your clients are interested in establishing or funding a grantor trust, you should consider working with them on it now before the new rules become effective.

 Valuation Discounts

The proposed legislation would eliminate valuation discounts for transfers after the date of enactment unless the asset gifted or sold is a trade or business. The new rules would apply to gifts of nonbusiness assets (such as closely held stocks or real property). Because any applicable discounts (for lack of marketability and lack of control) would be eliminated, the assets would be valued at full fair market value. This change will likely halt a common estate planning technique you may have implemented in the past: Contributing assets to a family limited partnership and then gifting the partnership interests.

AICPA Comments

On October 1, 2021, AICPA submitted to Congress comments on the House reconciliation legislation that the House Ways and Means Committee passed on September 15, 2021. The comments included concerns regarding some of the estate and gift tax provisions in the proposed legislation.

Grantor Trusts

AICPA thinks the proposed legislation regarding certain tax rules applicable to grantor trusts is drafted too broadly and may affect more trusts than intended. The legislation will eliminate many of the current benefits of certain grantor trusts. Certain trust assets will be included in the estate and subject to the estate tax, and lifetime distributions and remainder interests subject to gift tax. There could be income tax consequences as well. For example, the proposals could result in assets of many kinds of grantor trusts being taxed at different points when they aren’t now.

In addition to affecting defective grantor trusts, the provision appears to affect statutorily sanctioned grantor retained annuity trusts (GRATs), qualified subchapter S trusts (QSSTs), and qualified personal residence trusts (QPRTs), said AICPA. For instance, if GRATs and QPRTs convert to non-grantor trusts (or the trust assets are distributed) when the term expires, a deemed taxable gift may occur at that time. A deemed taxable gift nullifies the taxpayer benefit of a statutorily sanctioned GRAT or QPRT. AICPA suggested Congress clarify the scope of the provision.

Additionally, the provision could harm a beneficiary of a QSST with estate tax inclusion, leaving electing small business trusts (ESBTs) as the only permissible trust to be an S corporation shareholder without estate tax inclusion, said AICPA. It thinks the proposed legislation could also potentially pull back into an estate: irrevocable life insurance trusts (ILITs), grantor charitable lead annuity trusts (CLATs), and IRC section 679 (foreign grantor) trusts. For a beneficiary defective trust, clarity is needed on whether additional contributions by the grantor would result in estate inclusion for the beneficiary, added the AICPA.

It also expressed concerns with the proposed legislation’s administrative complexity. For example, gifts used to create a defective grantor trust will continue to be treated as reportable, which could trigger gift tax. The legislation provides proper adjustments if these same assets are later included in an estate or if a taxable gift occurs due to a distribution or a conversion, but AICPA said this increases administrative complexity. Additionally, AICPA said a trust that is partially exempt and partially non-exempt (due to contributions made after the date of enactment) further creates administrative complexity.

AICPA also suggested that Congress clarify the term “contribution.” The legislation indicates that the provisions are applicable to any portion of a trust established before enactment if the contribution is after the date of enactment. Clarification should include whether “contribution” includes new sales to existing grantor trusts, said AICPA.  “Contributions,” it said, should not include existing sales and loans with pre-enactment grantor trusts where in-kind distributions may be required to make the loan payments as well as the use of in-kind distributions for GRAT payments for a pre-enactment GRAT.

 Valuation Issues

 Regarding valuation discounts, AICPA is concerned that the legislation regarding valuation rules for certain transfers of nonbusiness assets is inconsistent with well-established valuation principles. This could result in valuations that do not reflect the true economic value of transferred assets. AICPA expressed concerns that the proposed legislation requires a 10% partial interest owner to provide a value that represents a proportional share of the value of the entire entity. This requirement unrealistically assumes that every interest holder, including those lacking control over the property, has equal access to adequate information to determine the fair market value of the entire property.

AICPA is also concerned that the legislation will create two different regimes for valuation: One for transfers of these nonbusiness assets for income tax purposes (such as on normal business transactions, income tax reporting and charitable gifts), and a second for gift and estate tax purposes, which creates confusion regarding post-transfer basis.


AICPA says a problem with the legislation is that many of its provisions tax estates in the same way as trusts, yet they are very different. Instead, AICPA recommends that Congress treat estates similar to married filing separately taxpayers for these provisions in the House reconciliation legislation, as well as existing law (such as income tax and net investment income tax). That’s the federal tax treatment estates received between 1954 and 1986.

Congress should also treat estates as if they were a continuation of the deceased individual and tax them as such, said AICPA. An estate serves a unique role, noted AICPA, by winding up the affairs of the deceased individual before distributing the assets to the individual’s heirs. Unlike trusts, estates are only created due to a death — an individual cannot create multiple estates.

AICPA also noted that trusts may exist in perpetuity in some states, while an estate’s time is limited. Most probate courts strive to expedite the collection and disposition of assets, frequently requiring explanations for any delay in distributing the assets and closing the estate. The executor cannot unduly prolong the period of administration of an estate. If the administration of the estate is unreasonably prolonged, the estate is considered terminated for federal income tax purposes after the expiration of a reasonable period for the performance by the executor of all the duties of administration.

Surcharge on Trusts and Estates

The AICPA suggested exclusion of certain trusts, such as charitable remainder trusts that are generally tax-exempt, from the 3% surcharge in the proposed legislation. As the legislation is currently drafted, it would only exclude wholly-charitable trusts. AICPA said Congress should specifically exclude grantor trusts as they are disregarded for income tax purposes as a separate trust. This may already be the implication, but a specific reference would make it clear and helpful. AICPA suggested mirroring the trusts excluded from the net investment income tax.

Legislative Process Just Starting – Not Enacted Yet

 As of press time, the House had not voted on the reconciliation legislation. After that vote, the Senate will need to consider either the same legislation or its own version, and any House-Senate differences will need to be negotiated by a conference committee before the final version of the legislation is passed by both the House and Senate and signed into law by President Biden.

Everyone should continue to monitor the congressional developments. Advisors should work with clients on possible planning options to consider before the legislation is enacted or at least before the end of 2021. AICPA will continue to monitor, inform practitioners, and advocate on trust, estate and gift tax legislation and implementation.

Eileen Reichenberg Sherr, CPA, CGMA, M.T., is director of Tax Policy & Advocacy at the Association of International Certified Professional Accountants (AICPA) and manages the AICPA Trust, Estate, and Gift Tax Technical Resource Panel. She assisted with drafting AICPA’s comments on the House’s 2021 tax legislation, and has discussed many estate tax issues with taxation experts.  Her email is




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