Capital Letters

Ways and Means Committee’s “Build Back Better Act”

Capital Letter No. 53
October 18, 2021

The House Ways and Means Committee has taken a widely discussed (and in many respects exasperating) step to foretell the tax legislation we might see this year.

Dear Readers Who Follow Washington Developments:

On August 24, 2021, pursuant to the Congressional Budget Act of 1974, as amended (2 U.S.C. §621 et seq.), the House of Representatives agreed to the Senate-approved Concurrent Resolution on the Budget for Fiscal Year 2022 (S. Con. Res. 14). The resolution set spending priorities of about $3.5 trillion for fiscal year 2022, which began October 1, 2021, and ends September 30, 2022. The votes were strictly partisan. In the Senate on August 11 the vote was 50-49, with all Democrats in favor and all Republicans opposed except Senator Mike Rounds (R-SD), who did not vote. In the House on August 24 the vote was 220-212, with all Democrats in favor and all Republicans opposed. The resolution left the House Ways and Means Committee and the Senate Finance Committee with flexibility to develop tax changes to pay for the contemplated expenditures.


On September 15, 2021, the House Ways and Means Committee approved the “Build Back Better Act” (H.R. 5376), a package of tax changes pursuant to the budget resolution. Only one Democratic member of the Committee, Rep. Stephanie Murphy (D-FL), joined all the Republicans in voting against it. The bill now is headed to the House floor, while we wait for a corresponding consideration of revenue proposals by the Senate Finance Committee.

The Ways and Means Committee bill does not include the proposals discussed in Capital Letter Number 52 that would treat gifts and transfers at death as gain realization events. This Capital Letter is a summary and analysis of just a few of the things the bill does include.


The sunset of the 2017 Tax Act’s doubling of the $5 million basic exclusion amount (indexed for inflation since 2012) would be accelerated from January 1, 2026, to January 1, 2022. Thus, the basic exclusion amount would return to $5 million, indexed for inflation since 2012, which the Joint Committee on Taxation (JCT) staff projects would be $6,020,000 for 2022. This is estimated to raise $54 billion over 10 years (mostly in the first five years before the original 2026 sunset). Obviously, the potential acceleration of the sunset has prompted acceleration of planning to use the increase in the basic exclusion amount before it sunsets. 


Corporate Income Tax Rates

Beginning January 1, 2022, the 21 percent corporate income tax rate would be retained for taxable income from $400,000 to $5 million, but it would be lowered to 18 percent on the first $400,000 of taxable income and raised to 26.5 percent on the amount of taxable income in excess of $5 million. This is estimated to raise $540 billion over 10 years.

Individual Income Tax Rates

Beginning January 1, 2022, the 39.6 percent top individual income tax rate, suspended for eight years by the 2017 Tax Act, would be reinstated for taxable incomes over $400,000 ($450,000 for joint returns and surviving spouses) and $12,500 indexed for trusts and estates. That amount is projected by the JCT staff to be $13,450 in 2022. In addition, a 3 percent surcharge would be applied to “modified adjusted gross income” over $5 million for individuals and $100,000 for trusts and estates. For this purpose, “modified adjusted gross income” is defined as adjusted gross income (AGI) minus any investment interest not deducted in determining AGI (in other words, deducted “below the line”).

The rate of income tax on capital gains would be increased from 20 percent to 25 percent to the extent the taxpayer is subject to the reinstated 39.6 percent top rate – that is, for taxable incomes over $400,000 ($450,000 for joint returns and surviving spouses and $12,500 indexed for trusts and estates). Notably, this provision was designed to take effect on September 14, 2021, with an exception for gains recognized in 2021 pursuant to written binding contracts entered into before September 14, 2021.

These changes are estimated to raise $421 billion over 10 years.

Expansion of Tax on Net Investment Income

Beginning January 1, 2022, the 3.8 percent tax on net investment income would be expanded by effectively eliminating the “trade or business” exception in section 1411(c)(1)(A) for individuals with “modified adjusted gross income” over $400,000 ($500,000 for joint returns and surviving spouses) and for trusts and estates with adjusted gross income in excess of the threshold for the highest income tax bracket for trusts and estates (projected by the JCT staff to be $13,450 in 2022). In this case, unlike the 3 percent surcharge, “modified adjusted gross income” is already defined in section 1411(d) as AGI plus, in effect, net foreign earned income excluded under section 911. This cutback of the trade or business exception is estimated to raise $252 billion over 10 years.

Among other things, with its application to trusts at a level of only $13,450, this provision, if enacted, would essentially render moot the issue of how a trust or estate satisfies the “material participation” test of section 469, which determines eligibility for the “trade or business” exception.

Limitation of Qualified Business Income Deduction

Beginning January 1, 2022, the complicated qualified business income deduction of section 199A (added by the 2017 Tax Act) would be capped at $400,000 for individuals ($500,000 for joint returns and surviving spouses) and $10,000 for trusts and estates. This is estimated to raise $78 billion over 10 years, mostly in the first five years before 2026 when section 199A is scheduled to sunset anyway.

The Effect on Trusts

The cumulative effects of a 3.6 percent increase in the income tax rate, a 5 percent increase in the tax on capital gains, and the elimination of the trade or business exception for purposes of the 3.8 percent tax on net investment income, all in the bracket over $13,450, plus the 3 percent surcharge on modified adjusted gross income over $100,000 and the $10,000 cap on the qualified business income deduction, would be very severe for trusts. That would be particularly true for non-grantor trusts that accumulate income. And making it a grantor trust offers no relief after the grantor has died. Or even while the grantor is alive, a subject to which we now turn.


Closer Alignment of Grantor Trust and Transfer Tax Rules

The bill approved by the Ways and Means Committee would create a new chapter 16, consisting solely of a new section 2901, effectively linking the grantor trust rules and the transfer tax rules so that a trust designed as a grantor trust would continue to be exposed to gift or estate tax with respect to the grantor. Thus the bill picks up, with some significant changes, the proposals in section 8 of Senator Sanders’ “For the 99.5 Percent Act” (S. 994), which in turn track the Obama Administration annual revenue proposals (“Greenbooks”). For detailed discussion of the “For the 99.5 Percent Act,” see Part 1.b of Washington Update, available at

With respect to a trust or portion of a trust that is not otherwise includable in the grantor’s gross estate, section 2901 would:

  • include the value of such portion in the grantor’s gross estate for estate tax purposes;
  • subject to gift tax any distribution from such portion during the grantor’s life, other than distributions to the grantor or the grantor’s spouse or in discharge of an obligation of the grantor; and
  • treat as a gift by the grantor, subject to gift tax, such portion at any time during the grantor’s life if the grantor ceases to be treated as the owner of such portion for income tax purposes.

Unlike the “For the 99.5 Percent Act,” this proposal would apply only to “any portion of a trust with respect to which the grantor is the deemed owner.” It omits the additional explicit application in the “For the 99.5 Percent Act” to the extent a deemed owner engages in a leveraged “sale, exchange, or comparable transaction with the trust” that appears to have been aimed at the technique known as a “Beneficiary Defective Inheritor’s Trust” (“BDIT”).

The creation of, or addition to, such a grantor trust would not escape gift tax, but, in determining future gift or estate taxes upon one of the events described in the bullet points above, “amounts treated previously as taxable gifts” would be “account[ed] for” with a “proper adjustment.”

Sales Between Deemed Owned Trust and Deemed Owner

Going a step beyond the “For the 99.5 Percent Act,” the bill would add a new section 1062 providing:

“In the case of any transfer of property between a trust and a person who is the deemed owner of the trust (or portion thereof), 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.”

The result would be that gain would be recognized by the deemed owner or by the trust, as the case may be, or possibly by both of them (in the case of a substitution of assets or other in-kind exchange, for example). The bill would also amend section 267 to disallow losses between “[a] grantor trust and the person treated as the owner of the trust (or portion thereof).” The new rule would not apply to a trust that is fully revocable by the deemed owner.

In short, Rev. Rul. 85-13, 1985-1 C.B. 184, the hinge on which so much of grantor trust planning swings, would be nullified (although it appears that things like the payment of rent or interest between a grantor and a grantor trust would not become taxable). Together, sections 2901 and 1062 would drastically reduce the usefulness of grantor trusts in estate planning.

Effective Date (or Dates?)

These new grantor trust provisions – sections 2901 and 1062 – are said to apply:

  • “to trusts created on or after the date of enactment of this Act” (that is, the date the President signs the act into law) and
  • “to any portion of a trust established before the date of the enactment of this Act which is attributable to a contribution made on or after such date.”

The Ways and Means Committee report, however, states that the income tax provision, section 1062, “is intended to be effective for sales and other dispositions after the date of enactment” – that is, regardless of when the trust was created or funded – but it adds in a footnote (footnote 935) that “[a] technical correction may be necessary to reflect this intent.” It is unusual to see a reference to a technical correct before a provision has even been enacted, but there are 17 references to “technical corrections” in this Ways and Means Committee report. It is not certain if or how such a “correction” might be made before the provision is enacted, but it is likely that the lawmakers and their staffs will try. And the consequences would be harsh. For example, the distribution of appreciated property from a trust to satisfy a right to a pecuniary amount is a gain realization event. (See Reg § 1.661(a)-2(f).) That would include the annuity payments to the grantor of a GRAT. And this “technical correction” would, for example, cause even the final annuity distribution in 2022 from a two-year GRAT created in 2020 to be a gain realization event.

Meanwhile, it is an understatement to note that there are a number of other uncertainties about how these grantor trust provisions would work. For example, what is a post-enactment “contribution”?

  • An exercise of a swap power? That apparently would be caught under the “corrected” effective date of section 1062, but for purposes of section 2901 certainly does not fit the normal view of a “contribution” as something that increases the value of the trust.
  • A payment or partial payment of a promissory note? Same analysis – typically not an addition of value or even treated like a sale when it occurs between separate taxpayers. But for section 2901?
  • The grantor’s payment of income tax on the grantor trust’s income? That is the classic feature of a grantor trust, and it does not seem to be affected by H.R. 5376 at all. But Letter Ruling 9444033 (Aug. 5, 1994) famously stated that “an additional gift to a remainderperson would occur when the grantor paid tax on any income that would otherwise be payable from the corpus of the trust.” One year later, the ruling was reissued with this paragraph explicitly deleted. Letter Ruling 9543049 (Aug. 3, 1995). Does Letter Ruling 9543049 really provide comfort that the grantor’s payment of the income is not a gift? And even if it is not a “gift,” could it still be a “contribution”?
  • The payment by the grantor-insured of premiums on life insurance held in an irrevocable life insurance trust (ILIT)? That does look like a contribution (unless an exception is added). But then, by the way, what is the “portion” of the ILIT that would then be subject to section 2901? And what if policy dividends are used to buy more insurance? Isn’t that just income from a trust asset? Will that matter, in the administration of section 2901? And so on and so on.

These grantor trust provisions together are estimated to raise $8 billion over 10 years, a relatively small number in this bill.


In a proposal traceable at least to the Reagan and Clinton Administrations and virtually identical to section 6 of Senator Sanders’ “For the 99.5 Percent Act,” the Ways and Means Committee bill would in effect require the valuation of nonbusiness assets in an entity by a look-through method. The proposal would add a new section 2031(d) to the Code, to read as follows:

“(d) Valuation Rules for Certain Transfers of Nonbusiness Assets—For purposes of this chapter [estate tax] and chapter 12 [gift tax]—

“(1) In General—In the case of the transfer of any interest in an entity other than an interest which is actively traded (within the meaning of section 1092) [see, e.g., Reg. §1.1092(d)-1(a) & (b)]—

“(A) 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 (and no valuation discount shall be allowed with respect to such nonbusiness assets), and

“(B) such nonbusiness assets shall not be taken into account in determining the value of the interest in the entity.”

Section 2031(d) would be applicable to transfers (by gift or upon death) after the date of enactment.

Similar to the “For the 99.5 Percent Act,” the proposal includes an 11-item list of what are considered “passive assets,” rules about passive assets that might be used in a business, and “look-thru rules” for entities that are at least 10 percent owned by another entity.

In addition, new section 2031(d)(2)(A) would provide that “[t]he term ‘nonbusiness asset’ means any passive asset which (i) is held for the production or collection of income, and (ii) is not used in the active conduct of a trade or business.” That implies that, for example, a vacation home that is not rented would not be valued under the proposed look-through rule, which is a bit surprising.

The proposal adds a broad grant of regulatory authority, specifically including the issues of whether a passive asset is used in the active conduct of a trade or business or is held as part of the reasonably required working capital needs of a trade or business.

Unlike the “For the 99.5 Percent Act,” the proposal does not also 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 and thus would arguably have a much broader and harsher impact on family businesses. But family business owners may still not welcome what could be an intrusive and burdensome inquiry into the possible harboring of “nonbusiness assets“ in the business.

This proposal is estimated to raise $20 billion over 10 years.


In contrast to the preceding provisions that would make the estate and gift tax more burdensome, the Ways and Means Committee bill, effective January 1, 2022, would increase the limit on the reduction under section 2032A in the estate tax value of real property used in a family farm or other family business resulting from valuing the real property in that farm or business use, even if that is not its “highest and best use.”

Currently the limit on that reduction is $750,000, indexed for inflation since 1998 ($1,190,000 in 2021). Such an increase in the limit has often been offered by lawmakers opposed to across-the-board repeal or reduction of the estate tax as a way to target relief to the family farms and businesses that are often cited as justifications for such repeal or reduction.

Unlike section 3 of the “For the 99.5 Percent Act,” which would increase the limit to only $3 million, indexed for inflation going forward, the Ways and Means Committee proposal would raise the limit to $11.7 million (which happens to be the current basic exclusion amount), indexed going forward.

Even so, the proposal would not really reduce the estate tax on a family farm or business as such; it would merely prevent a tax, for example, on a speculative prospect of development that is faced by such businesses very unevenly. Thus, this proposal should not be expected to be viewed by owners of family farms and businesses as much of a consolation.

This proposal is estimated to decrease revenues by $317 million over 10 years.


It would be wonderful to conclude a summary like this with a report, or a prediction, or at least a guess, of what will happen to these proposals. But no one knows, including, I daresay, the members of Congress themselves. Much depends on how the Senate’s approach differs from the House’s approach. We don’t even know if the Ways and Means Committee bill has enough House support to become “the House’s approach.” That might depend not only on the staffs’ opportunity to make at least a dent in the technical issues, but on the durability of the proposals – especially those that might affect family businesses – to withstand the political headwinds they almost certainly will face. One need only recall the reactions to the proposed section 2704 regulations in 2016, which may have been more moderate than these legislative proposals.

The political environment is not simple. Everyone knows how close the margins of control are. And deadlines loom. Surface transportation runs out of funding on October 31. The government itself is now funded only through December 3. And – spoiler alert – the year ends on December 31. This last point, however, may be the least significant; remember the American Taxpayer Relief Act of 2012 that President Obama signed on January 2, 2013.

Ronald D. Aucutt

© Copyright 2021 by Bessemer Trust Company, N.A. All rights reserved.