Use it or Lose it:
The Sanders 99.5% Act’s Estate Tax Proposal
On March 25, 2021, Senator Sanders and the Whitehouse formally proposed a bill which would make changes to the current estate and gift tax system. This bill apparently has some support among Democratic Senators and Congressmen. While it is the hope of many that this proposed law will not be enacted, it seems best to “plan for the worst and hope for the best,” given the unpredictable political climate, and the possible changes that may be made if a watered-down version of this potent proposed law passes.
The good news is that the reduction of the estate tax exemption amount from $11,700,000 to $3,500,000 would not occur until January 1, 2022. The same timing applies for the proposed reduction of the gift tax allowance to only $1,000,000, which means that people will not be able to gift more than $1,000,000 after 2021 without paying a gift tax.
Also, the proposed increase in the estate tax rate to 45%, once a deceased person’s taxable estate exceeds $3,500,000, and 50% and higher when the amount subject to tax exceeds $10,000,000, will not apply until 2022. In addition to the above exemption and tax changes, gifting of up to $15,000 per year per person will be limited to $30,000 per donor per year for gifts to irrevocable trusts or of interests in certain “flow through entities” beginning in 2022.
The tougher news for many of our readers is that some of the primary tools and strategies that we have successfully used in the past will not be available in the future. These changes will begin on the date President Biden signs the bill into law, if indeed this occurs. Once that happens, we will not be able to fund or have assets sold to Irrevocable Trusts that can be disregarded for income tax purposes. And we will not be able to use valuation discounts or Grantor Retained Annuity Trusts (GRAT’s) in most circumstances. However, those arrangements put into place before the new law is passed will be grandfathered, as long as they are not added to or altered after the law is passed, as presently written.
This is an important call to action for families having assets expected to exceed $3,500,000 per person. These individuals will need to take a serious look at their present planning situation to determine whether to take immediate steps to avoid death taxes.
Readers who have irrevocable trusts may want to act without delay to extend any notes that may be owned by them to the longest period practical. They might consider selling certain assets that may go up in value and exchange them for assets that may be more suitable to be owned by these trusts, given that exchanges and changes made after a new law is passed may not be possible.
Push to Eliminate Step-Up in Basis: With a $1 million Exemption: During his 2020 campaign, President Biden proposed and urged an elimination of the tax-free step-up in basis at death presently afforded by the Tax Code. The basis adjustment at death has been part of the Code for decades but has progressively been targeted as a means to raise revenue.
According to a summary published by Senator Van Hollen, the Joint Committee on Taxation estimates the tax-free step-up in basis costs the United States approximately $41.9 billion in 2021 alone. Further, this summary asserts that 55% of the wealth in estates over $100 million is untaxed capital appreciation, currently benefiting from a tax-free step-up in basis.
The STEP (“Sensible Taxation and Equity Promotion”) Act would tax unrealized capital gains on death, effective for deaths after January 1, 2020. However, the Act includes a few “softeners”: (i) a $1 million exemption to “protect” smaller estates; (ii) up to 15 years to pay the tax for illiquid assets, like business entities and farms; and (iii) a deduction against the estate tax (for the gains taxes due) for larger estates.
Nevertheless, the taxation of previously untaxed gains would be a major change in federal tax policy with wide-ranging implications on estate planning. Especially for clients with depreciated real estate, the impact could be far-reaching. It would also greatly complicate the administration of estates, as there would now be a need for fiduciaries to figure out what the historical tax basis might be for assets.
Most estate and trust law firms have been exceedingly busy with estate tax planning since the middle of last year and are generally operating at capacity. If you wish to complete an estate tax plan or have put your estate planning off for far too long, now is the time to get yourself into queue and get this done, putting your plan into action before this new law may pass.
As with most firms, we will give immediate focus to those who contact us without delay and have plans in place or in progress. If you do not have an estate tax planning structure or a plan in process we recommend you start before the demand for these services causes many firms to be unavailable to finish before a new law may be enacted.