Big Changes Could Loom for Estate and Gift Taxes

Michael Panebianco | April 23, 2021

U.S. Sen. Bernie Sanders of Vermont recently introduced the For the 99.5% Act, which, if enacted, would likely affect almost all taxpayers in one way or another, despite the title of the act suggesting otherwise. It is anticipated that a similar bill will be introduced in the House of Representatives.

Some of the proposed changes that would become effective Jan. 1, 2022 are:

  • The estate tax exemption would be reduced to $3.5 million from the present level of $11.7 million per person. Accordingly, married couples would have a combined $7 million estate tax exemption instead of a $23.4 million exemption. The $3.5 million exemption amount would increase with inflation.
  • The gift tax exemption would be limited to $1 million, and that amount would not increase with inflation.
  • The estate, gift and generation-skipping transfer (GST) tax rate would increase from the current maximum rate of 40% to a top rate of 65% (the lowest tax rate would be 45%). Since transfers subject to the GST tax are taxed at the highest applicable federal estate tax, a 65% tax would be imposed on generation skipping transfers.

Other proposed changes would become effective as of the date of enactment, which could happen this year. Some of these proposed changes include the following:

  • Valuation discounts for non-business assets and entities would be eliminated. The effect would cause the valuation of most family entities to be based on the value of the underlying assets owned by the entity multiplied by the pro-rata percentage of ownership, with few exceptions. Accordingly, common valuation discounts for lack of marketability and minority interests would no longer be available.
  • Trusts that are funded or transacted with after the date of enactment of the act and are considered to be owned by the grantor for income tax purposes, or by a person who exchanges assets with such a trust, will be includable in the taxable estate of the grantor for estate tax purposes upon the grantor’s death as if the grantor owned the assets of the trust.
  • Grantor retained annuity trusts (GRATs) would have to have a minimum 10-year term, and the maximum term would be the life expectancy of the annuitant plus 10 years. In addition, the remainder interest, determined at the time of transfer, must be not less than the greater of 25% of fair market value of the trust’s assets or $500,000. This change would effectively eliminate the use of GRATs in any meaningful way.
  • Currently, individuals can give up to $15,000 per donee with no limit on the number of donees. The act would limit annual gifts by a donor to twice the annual exclusion for transfers to a trust, transfers of an interest in a passthrough entity, transfers of an interest subject to a prohibition on a sale, and any other transfer of property that, without regard to withdrawal, put or other such rights in the donee, cannot immediately be liquidated by the donee. This could affect existing irrevocable life insurance trusts and other strategies that are currently part of a person’s estate plan.
  • Trusts that have a termination date of more than 50 years after the date of creation will have an inclusion ratio of one for GST tax purposes. This means that every distribution from such a trust to a generation-skipping person (such as a grandchild or lower generation) will be subject to the highest applicable estate tax rate, which would be 65% under the act. Existing trusts would be deemed to have an inclusion ration of one, i.e., subject to the GST tax, 50 years after enactment of the act.

While there is no guarantee that the For the 99.5% Act will become law as currently drafted, it is likely to be the starting point or road map for what will ultimately be enacted. Considering some of the proposals are substantively similar to those in the For the 99.8% Act in 2019 and President Obama’s final proposed budget in 2016, and given the current momentum and desire in the Senate and House of Representatives to make a change, it shouldn’t come as a surprise if the For the 99.5% Act, or a version of it, gets enacted later this year.

Those concerned with these potential changes should consider reviewing their current estate plan and revising it as appropriate, which may include making significant gifts while the current estate and gift tax exemptions are still available.

This article was originally published in the New Hampshire Business Review and can be found here.