Everyone Could Be Affected by Proposed Estate Tax Changes


Michael P. Panebianco | April 15, 2021

Senator Bernie Sanders of Vermont recently introduced the “For the 99.5% Act.” If enacted, it 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 January 1, 2022 include the following:

  • The estate tax exemption would be reduced to $3.5 million from the present level of $11.7 million per person.
  • The gift tax exemption would be limited to $1 million.
  • 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, of course, happen this year.  Some of these proposed changes include the following:

  • Valuation discounts for non-business assets and entities will be eliminated.
  • Trusts that are considered to be owned by the Grantor for income tax purposes will be includable in the taxable estate of the Grantor for estate tax purposes upon the Grantor’s death.
  • 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 certain transfers, including transfers to a trust and transfers to an interest in a passthrough entity.  This could affect existing irrevocable life insurance trusts and other strategies that are currently part of a person’s estate plan.
  • Trusts that are exempt from the GST tax will no longer be exempt from the tax 50 years after enactment, and new trusts that have a termination date of more than 50 years after the date of creation will not be exempt from day one.