After the Democrats took control of the presidency and Congress earlier this year, questions began to circulate about possible changes to federal estate and gift tax laws, including reducing tax exemptions and increasing tax rates. Senator Bernie Sanders (I-VT) recently introduced a law called "For the 99.5% Act," which makes major changes to current federal wealth tax laws.
It remains to be seen whether or not Congress will pass the bill in whole or in part. Even so, the bill deserves our attention and certain taxpayers may consider additional planning to minimize the potential impact of this or similar legislation that might be included in the bill.
Under the proposed law, the federal estate tax exemption, which is the amount of estate that can be tax-free upon death, would be greatly reduced. Federal estate tax would apply to individual estates with assets greater than $ 3.5 million in the event of death. (The current lifetime exemption is $ 11.7 million per person.)
Estates with assets in excess of the exemption would be taxed at graduated rates starting at 45 percent for estates between $ 3.5 million and $ 10 million and 50 percent for assets between $ 10 million and $ 50 million. Thereafter, the tax rate on assets over $ 50 million will increase to 55 percent to $ 1 billion, with a 65 percent tax on assets over $ 1 billion.
In accordance with applicable law, lifelong gifts given by an individual continue to reduce the inheritance tax exemption available on death by the accumulated amounts of such gifts. However, according to the Sanders bill, the lifetime gift tax exemption would decrease to $ 1 million per person. If passed, all cumulative gifts given during life over the $ 1 million exemption would have a current gift tax payable even if the cumulative gifts were less than the $ 3.5 million exemption for Death transfers from the estate. Gifts made before the bill went into effect will count towards (reduce) the new $ 1 million lifetime exemption. However, if these prior gifts exceed the new exemption, there does not appear to be any retrospective ramifications for gifts or estate taxes on those gifts.
In the event of a law, the new estate and gift tax exemptions and rates will apply to estates of deceased who die and gifts given after December 31, 2021.
The Sanders bill would also affect planning multiple generations with trusts. The current transfer tax exemption from transfer tax of $ 11.7 million on gifts or bequests to multi-generational trusts or anyone two or more generations younger than the transferor would also be increased to $ 3.5 million US dollars reduced. In addition, the Sanders proposal would also prevent trusts otherwise exempt from generation skip transfer tax from avoiding generation skip transfer tax for more than 50 years, increasing the ability to create new long-term trusts in the context of the current transfer for skipping generations effectively weakens tax law. Existing trusts created prior to the enactment date of the draft law could not avoid taxation until 50 years after the enactment of the law at the latest.
The Sanders Bill also limits the use of so-called annual lockout gifts, which currently allow an individual to give tax-free gifts of up to $ 15,000 per year to each recipient without reducing the lifelong gift or inheritance tax exemption. In particular, the bill would limit the ability to apply the annual exclusion to gifts to trusts, gifts of interests to pass-through businesses such as limited liability companies or partnerships, transfers of interest that are prohibited from sale, and transfers of ownership that cannot be liquidated immediately. These restrictions apply to every calendar year that begins after the law comes into force.
Transfers of illiquid assets to family members are often subject to valuation haircuts due to poor marketability or control. These marketability and minority discounts for many family businesses would no longer be permitted for the transfer of interests between family members in the future. These restrictions would apply to transfers made after the effective date of the law.
Grantor Retained Annuity Trusts (GRATs), a legally created type of gift trust, currently enable taxpayers to create short-term trusts to pass on future income and appreciation of assets to children or anyone else with little or no gift tax expense at the end of the term of the Trusts. The Sanders Bill limits the practical use of GRATs by imposing a minimum term of 10 years on the trust. The bill would also prevent taxpayers from zeroing transfers to GRATs, requiring the gift tax exemption or paying gift tax to fund a GRAT. These changes would apply to transfers made after the effective date of the law.
In addition, the Sanders Bill would also change the existing law that allows trust grant recipients to continue to pay income tax on income or gains on assets after the grantor transfers assets to trusts. Currently, these tax payments are not considered to be taxable gifts to the trust recipients (thus allowing the trust assets to grow for the beneficiaries without a tax reduction). Under Sanders Act, the portion of a trust over which a grantor retains certain powers that result in the grantor's personal income tax liability could be subject to estate tax on the grantor's estate in the event of death. If a grantor gives up these so-called grantor trust powers during the grantor's lifetime and thereby causes the trust to pay its own income tax in the future, the grantor may also be treated as if he had given the trust an additional taxable gift. These changes apply to all trusts created on or after the Sanders Bill came into effect, to contributions to trusts after the Bill went into effect regardless of the date a trust was created, and to certain parts of trusts that were created before the Bill went into effect.
In his written summary of his new tax proposal, Senator Sanders listed 657 billionaires in America and claimed more than half of their total assets would be paid in taxes under his plan.
The Estate Planning and Trust & Estates practice group at K&L Gates strictly follows this tax law. If you have any questions, please contact us to discuss your personal planning situation.