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The Inflation Reduction Act and Estate Planning
Friday, August 19, 2022

President Biden signed the Inflation Reduction Act of 2022 (H.R. 5376) into law on Tuesday, Aug. 16. The Inflation Reduction Act is much smaller than the sweeping $3.5 trillion package the Senate passed in August 2021 or the $2 trillion Build Back Better Act (“BBBA”) the House passed in November 2021. Some of the highlights of the Inflation Reduction Act include:

  • A 15% corporate alternative minimum tax.

  • A 1% excise tax on stock buybacks.

  • Extended and new renewable energy tax credits.

For the estate planning community, the most significant thing about the Inflation Reduction Act is what it does not contain. The BBBA contained many proposals that would have directly impacted high-net worth individuals and many of the wealth planning strategies that have been used for years by estate planners when advising their high-net worth clients. The proposals included:

  • A decrease in the estate, gift and generation-skipping transfer tax exemptions.

  • Changes to the grantor trust rules which would have, among other things, effectively eliminated the sale to an intentionally defective grantor trust planning technique.

  • The elimination of valuation discounts for nonbusiness property when valuing ownership interests in privately held companies.

  • A surcharge on high-income individuals.

  • Increases in the top marginal income tax rate.

  • Increases in the top long-term capital gains rate.

  • Reduction in the qualified small business stock gain exclusion under IRC Sec. 1202.

None of these provisions found their way in the Inflation Reduction Act. This does not mean that there could not be other tax legislation enacted this year but at this stage of the year and due to the fact that it is an election year, the likelihood of any significant tax law changes occurring before the end of the year is slim.

One area of the Inflation Reduction Act that is worth highlighting for high-net worth and high-income individuals and those professionals that advise them is the increase in the IRS budget of $80 billion to be funded over a 10 year period. Approximately $46 billion of this amount is to be dedicated to enforcement which is expected to increase the number of audits.

For anyone interested in more detail about some of the key tax provisions in the Inflation Reduction Act, we refer you to our previous reports on the Inflation Reduction Act.

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