On March 25th, Senator Bernie Sanders introduced legislation in the Senate titled “For the 99.5% Act”, representing the first piece of legislation this year to propose lowering the estate tax exemption along with other key proposals since President Biden took office.
On March 29th, Senator Chris Van Hollen introduced a bill that would tax gain on capital assets at death and many gifts.
While these pieces of legislation are only proposed and would have to follow typical protocols prior to being voted on and enacted, we thought it was important to provide bullet points on the key provisions of the bills as they relate to estate planning.
Together, the bills include the following proposals:
- A reduction of the estate tax exemption amount from the current $11.7 million to $3.5 million for decedents dying after December 31, 2021
- A reduction of the gift tax exemption from the current coupled $11.7 million to $1 million for gifts made after December 31, 2021
- Increases in the gift and estate tax rates from the current flat 40% to 45% for the excess value over $3.5 million, 50% for the excess value over $10 million, 55% for the excess value over $50 million, and 65% for the excess value over $1 billion for deaths occurring or gifts made after December 31, 2021
- Confirmation that assets in a grantor trust do not receive a basis step-up unless they are included in the grantor’s taxable estate
- A requirement that grantor retained annuity trusts (GRATs) have a minimum 10-year term and at least a 25% value for the remainder interest
- An elimination or reduction of the use of valuation discounts on transfers of entities that do not conduct an active trade or business
- An elimination technique such as a Sale to Grantor Trusts or leveraging substitution powers to shift assets around.
- A limit on multi-generation trusts that are exempt from generation skipping transfer taxes that last longer than 50 years
- Distributions from grantor trusts would be subject to gift tax at the time of the distribution
- Capital gains tax on assets passed at death which includes an exemption for up to $1 million in unrealized capital gains for an individual, or $2 million per couple
These two proposals are broad in scope and together cover many of the changes that have been recently discussed by various parties inside of Washington. While it is important for you to understand the nature of proposals being made around transfer taxes, it is also important that we are very clear about the current impact of these proposals.
At this time we do not know the likelihood that these bills will progress or that some form of them might be enacted into law. However we are closely watching them and believe they are helpful in revealing some of the thought processes currently underway around possible tax increases, though they are not a definite indicator of what those potential increases will be.