The aggressive changes being sought after are an indication that some level of transfer tax reform is likely to be heading our way before year end.
Over the past few weeks, two tax bills were introduced. The first bill, written by Senators Bernie Sanders and Sheldon Whitehouse, would make substantial changes to the extremely favorable gift and estate tax laws that we have enjoyed over the past several years. The second bill, which was authored by Senator Elizabeth Warren and others, introduced a proposal to significantly alter the “step up in basis” rules at death.
Shortly before the 2020 elections, in anticipation of the Democrats potentially controlling the Presidency and both houses of Congress, I wrote an article discussing certain estate tax reduction strategies that could still be taken advantage of prior to any law changes. Within the article, I expressed concern any changes to the law made in 2021 could be retroactive to the beginning of the year. If changes were retroactive, any planning to take advantage of the current law would have had to have been completed in 2020. The good news is the proposed changes set forth in the Sanders/Whitehouse bill will not be retroactive to the beginning of the year. Instead the bill calls for certain changes to become effective upon enaction and certain changes to become effective on January 1, 2022. The bad news is that the proposed changes are very unfriendly to taxpayers. Here are a few of the highlights from that bill:
- The estate tax exemption would be reduced from the current $11,700,000 to $3,500,000.
- The gift tax exemption amount would be reduced from the current $11,700,000 to $1,000,000.
- The estate tax rate would be increased from its current rate of 40%. The rate would be 45% on estates from $3,500,000 to $10,000,000; 50% on estates from $10,000,000 to $50,000,000; 55% on estates between $50,000,000 and $1,000,000,000; and 65% on estates in excess of $1,000,000,000.
- The annual gifting exclusion would be decreased from $15,000 per donee to $10,000 per donee. In addition, and perhaps more importantly, the total amount of annual exclusion gifts that can be made by a donor in any year would be capped at $20,000 (the current law contains no cap). In other words, an individual that was making $15,000 gifts to five beneficiaries each year (for a total of $75,000 of annual exclusion gifts) will now only be able to make $4,000 gifts to each of those five beneficiaries (for a total of $20,000 of annual exclusion gifts).
- Grantor trusts for federal income tax purposes (funded or transacted after enactment of the changes) will be subject to the estate tax at the grantor’s death. The use of grantor trusts is one of the primary tools used by estate planners. This change would all but eliminate this most popular tool for estate tax planning.
- Grantor retained annuity trusts (GRATs) would have to have a minimum 10-year term and a minimum gift value on funding of at least $500,000 or 25% of the fair market value of contributed assets. These changes would make GRATs significantly less attractive.
- Discounts for interests in family non-business entities would be eliminated.
Unlike the Sanders/Whitehouse bill, the Warren bill would be retroactive to January 1, 2021. This proposal provides for taxation on unrealized appreciation at death in excess of $1,000,000. This is a significant departure from the long standing “step-up in basis” rule and could result in taxation at death even on estates that are below the estate tax exemption threshold.
It is important to note that these are just proposals at this time. We do not know whether any portion of these bills will ultimately be enacted into law. Having said that, the aggressive changes being sought after are certainly an indication that some level of transfer tax reform is likely to be heading our way before year end. Please reach out to me if you are concerned about what these changes might mean for you and your family. There is still time to take advantage of the current laws while they are in force.
We look forward to speaking to you.