One of the most valuable things that comes with using a dedicated estate planning attorney is allowing them to keep you abreast of potential legislation which could affect your planning.
Right now, there are two pieces of pending legislation that have Estate Planners buzzing, us included. First, on March 25, 2021 Senator Bernie Sanders (VT) and Senator Sheldon Whitehouse (RI) have put forth a bill titled, “For the 99.5% Act.” How does this bill affect Estate Planning? Well, the current estate and gift tax exemption is $11.7 million per person; amounts transferred to heirs above this exemption are subject to a 40% tax. The "For the 99.5% Act" would dramatically restructure the estate tax by reducing the tax exemption from $11.4 million to $3.5 million.
Some of the more significant provisions of for the 99.5% Act include:
- Reduction of the estate tax exemption amount to $3.5 million per person; $7 million for a married couple. The exemption would continue to be indexed for inflation.
- Reduction of the gift tax exemption to $1 million per person; therefore, the system would no longer be unified and would be more limited in the amount that can be transferred during one’s lifetime.
- Change in the estate and gift tax rate from a flat 40% rate to a progressive system as follows:
- 45% of the value of an estate between $3.5 million and $10 million
- 50% of the value of an estate between $10 million and $50 million
- 55% of the value of an estate between $50 million and $1 billion
- 65% of the value of an estate in excess of $1 billion
- Elimination of valuation discounts for nonbusiness assets, such as family-owned limited liability companies funded with investment assets.
- Elimination of what are commonly referred to as “Defective Grantor Trusts” by adding a provision to the Internal Revenue Code stating that a trust funded by a grantor after the date of the legislation is considered owned by the grantor for both income and estate tax purposes.
- Restrictions on funding of new GRATs (Grantor Retained Annuity Trusts), imposing a minimum term of 10 years and minimum gifts upon funding.
- Limitations on “dynastic” trusts that are intended to go on for multiple generations by requiring the trust to terminate for estate tax purposes after 50 years.
- Changing the annual gifting exemption (currently $15,000 per donee per year) to $10,000 per donee and adding an annual cumulative limitation per donor of two times the annual limitation. Limitations are also put in place when making gifts to trusts, family entities, or other entities where the assets can’t be immediately liquidated.
The effective dates for the foregoing changes will be for decedents dying after December 31, 2021, and for gifts made after December 31, 2021.
Secondly, concerning recent legislation, U.S. Sen. Chris Van Hollen (D-Md.), along with Senators Cory Booker (D-N.J.), Bernie Sanders (I-Vt.), Sheldon Whitehouse (D-R.I.) and Elizabeth Warren (D-Mass.) just announced a new proposal titled the Sensible Taxation and Equity Promotion (STEP) Act, to eliminate a stepped-up basis at death.
- The bill would allow individuals to exclude up to $1 million in unrealized capital gains from tax, as well as to pay the tax in installments over a 15-year period for capital gains that apply to any non-liquid asset like a farm or business.
- The bill allows for the first $1 million in unrealized capital gains from the transfer of assets to be excluded from this tax while retaining a separate exclusion for personal residences.
- The $1 million exclusion for gains from the transfer of assets is especially lower than the current $11.7 million estate tax exemption.
As a result, the STEP Act would add a new tax for estates with capital assets valued over $1 million but a taxable estate value under $11.7 million, which are currently not subject to the same tax. Under this proposal, the transfer tax on unrealized capital gains is now due at the time of the transfer and applies not only to transfers at death, but also to lifetime transfers to individuals or trusts.
It’s also important to note that the proposed transfer tax does not appear to allow for a $15,000 annual gift exclusion per recipient which currently exists. Instead, the bill allows for an individual to utilize up to $100,000 of the $1 million transfer exclusion for lifetime gifts; this value is cumulative for gifts to all recipients and overall years. Once this amount is exceeded, any future gifts during a lifetime would be subject to the transfer tax. The amount of the gift would be reported by the giver in a manner as if it had been a sale at market value, then generating unrealized capital gains on the “sale” of the gifted asset. Changes would be retroactive to January 2021.
Currently, Internal Revenue Code Section 1014 provides that inherited assets have their basis reset to a current fair market value at the exact moment they’re passed on to an inheritor in a will, meaning that heirs don’t pay taxes on unrealized capital gains from the inheritance. In short, this changes everything.
These bills are merely pending at this time and have not become law. However, it shows a real appetite to change the landscape for estate planning and estate planners. Keeping your estate planning up to date is important in the best of times, but could be especially critical this year and the years to follow. Make sure you have regular reviews with your estate planning attorney to make sure you don’t get caught unaware.