Update: Ways and Means Committee Proposes New Legislation

Kleinberg Kaplan recently sent a Trusts & Estates Client Alert discussing potential changes to the tax law that were proposed by the House Ways and Means Committee (click here for the Client Alert). A recent report issued by the House Budget Committee regarding the proposals has important implications concerning the proposed provisions related to grantor trusts which were discussed in the Client Alert.

The language of the Ways and Means Committee proposal seemed to indicate that the new rules concerning grantor trusts would only apply to: (i) new grantor trusts; and (ii) existing grantor trusts that receive contributions after the new law is enacted. Grantor trusts that existed before enactment that did not receive additional contributions after enactment would not be subject to the new rules. In other words, the new legislation would allow existing grantor trusts to continue to enter into tax-free transactions with the grantor, so long as the grantor does not make any additional contributions to the trust after the law is enacted.

The House Budget Committee report, however, indicates that the proposed provisions are intended to tax gains on post-enactment sales and exchanges between grantors and all grantor trusts (including existing trusts that have not received post-enactment contributions). The report seems to acknowledge that this is not clear from the language of the proposal and notes that a technical correction to the proposed legislation may be necessary to ensure that the legislation fulfills the intended purpose.

If the Budget Committee’s interpretation is accepted, it would have significant tax ramifications for existing grantor trusts. Therefore, individuals contemplating transactions with grantor trusts should consider completing those transactions as soon as possible in order to avoid any potential adverse tax consequences under the new law.

As with any proposed legislation, it is difficult to predict what may or may not become law and whether the current proposal will be enacted, modified, or eliminated altogether. We will continue to carefully monitor new developments and provide additional updates as the situation evolves. Please do not hesitate to reach out to your regular Kleinberg Kaplan attorney, any member of our Trusts & Estates department listed below, or a member of our Tax department to discuss how these provisions could impact you and what you might do proactively to plan for any new legislation.