Proposed Estate & Gift Tax Reform

On March 25, 2021, Senators Sanders and Whitehouse introduced a bill titled “For the 99.5% Act.” If enacted, the following are among some of the significant provisions:

  • Federal estate tax exemption reduced from $11.7 million to $3.5 million
  • Gift tax exemption reduced from $11.7 million to $1 million
  • Increase in estate and gift tax rates from 40% to up to 65%
    – 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
  • Changing the annual exclusion (currently $15,000 per donee per year) to $10,000 per donee and adding an annual cumulative limitation per donor
  • Restrictions on funding of new Grantor Retained Annuity Trusts (GRATs), imposing a minimum term of 10 years and minimum gifts upon funding
  • Elimination of valuation discounts for nonbusiness assets, such as family-owned limited liability companies funded with investment assets

In addition, on March 29, 2021, the “Sensible Taxation and Equity Promotion (STEP) Act” bill was introduced in the Senate. If passed, this Act would in general eliminate the step-up in basis rule
for assets owned at death and treat property as sold for its fair market value when transferred by gift or bequest. This law would tax unrealized capital gains on death, effective for deaths after December 31, 2020. However, there are a few softeners:

  • A $1 million exemption to protect smaller
  • Up to 15 years to pay the tax for illiquid assets, such as business entities and farms
  • A deduction against the estate tax (for the gains tax due) for larger estates

The Biden administration has proposed similar reforms. It is impossible to determine what will eventually become law. If you have concerns about how potential changes to the estate and gift tax laws could affect your estate plan and the strategies you might consider in order to mitigate the effects of the changes, please contact your estate planning attorney.

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