Exempts the first $3.5 million of an individual’s estate from the estate tax. This plan would only impact the wealthiest 0.5 percent of Americans who inherit more than $3.5 million ($7 million for married couples).
Establishes a new progressive estate tax rate structure as follows:
45 percent of the value of an estate between $3.5 million and $10 million;
50 percent of the value of an estate between $10 million and $50 million;
55 percent of the value of an estate between $50 million and $1 billion; and
65 percent of the value of an estate in excess of $1 billion.
Ends tax breaks for dynasty trusts.
The bill would:
Strengthen the “generation-skipping tax,” which is designed to prevent avoidance of estate and gift taxes, by applying it with no exclusion to any trust set up to last more than 50 years.
Prevent abuses of grantor retained annuity trusts (GRATs) by barring donors from taking assets back from these trusts just a couple of years after establishing them to avoid gift taxes, while earnings on the assets are left to heirs tax-free. Among other requirements, the bill would require the right to receive the fixed amounts for a term of not less than 10 years and not more than the life expectancy of the annuitant plus 10 years.
Prevent wealthy families from avoiding gift taxes by paying income taxes on earnings generated by assets in “grantor trusts.” In addition, subject to various requirements and limitations, the bill would generally include the value of the grantor trust assets in the gross estate of the deceased deemed owner. Any distribution from the grantor trust, to one or more beneficiaries during the life of the deemed owner, shall be treated as a transfer by gift. Further, if at any time during the life of the deemed owner, such owner ceases to be treated as the owner under the “grantor trust” income tax rules, such assets shall be treated as a transfer by gift made by the deemed owner. Gifts made to the trust may be excluded from estate inclusion.
Sharply limit the annual exclusion from the gift tax – which was meant to shield the normal giving done around holidays and birthdays from tax and record keeping requirements – for gifts made to trusts.
The provisions of the bill would apply to most traditional estate planning designs and techniques utilizing trusts. In general, under the proposal there would be a limit per donee. That is, in the case of gifts made to any person by the donor during the calendar year, the first $10,000 of such gifts to such person shall not, for purposes of the annual exclusion, be included in the total amount of gifts made during such year. In addition, there would be a cumulative limit per donor. Broadly speaking, the aggregate amount excluded under the annual exclusion made by the donor during the calendar year shall not exceed twice the dollar amount (e.g., $10,000) in effect for such calendar year.
This Bill Will Close Other Loopholes in the Estate and Gift Taxes
One of these loopholes involves “valuation discounts,” restrictions placed on interests in family businesses which are claimed, to reduce the value of the estate. Another loophole involves claiming that the value of an inherited asset is lower, for estate tax purposes, than what is claimed for income tax purposes to calculate gains when the asset is sold.
If you believe President Biden’s or Senator Sanders’ income and/or estate tax proposals will become law, you might consider the following actions:
Accelerate income recognition to taxable date prior to any legislation’s effective dates, where income tax rates may be lower if income tax legislation increase income tax rates.
Consider pre-effective date bonuses
For those contemplating a Roth conversion, a conversion before any effective date
Maximize retirement contributions (e.g., 401(k) and deductible IRAs)
Assuming itemized deductions are otherwise allowable, accelerate income tax deductions, because income tax deductions may be limited under new legislation.
With respect to estate planning in 2021, utilize gifts of the current $11.70 million (per person) exemption, valuation discounts, non-reciprocal spousal lifetime access trusts, and other estate and gift tax reducing strategies. Assuming such gifts can be made prior to any effective date, including the possibility of retroactive effective dates.
As with all legislative bills, it is imperative to understand that Senator Sanders’ proposal is just that, a proposal. The Senate bill has 4 co-sponsors. Alternatively, on March 9, 2021 Senator Thune (R-SD) introduced a Senate bill (S 617), to repeal the estate and generation-skipping taxes. S 617 has 31 co-sponsors in the Senate.
With respect to the introduction of bills in Congress, proposed legislation is just the beginning of the legislative process. Given the overall process of enacting legislation, including committee hearings, votes in both the House and Senate, Conference committees, signature by the President, etc., it is fair to say that no one knows what final legislation will look like until it is passed.
Senator Sanders’ proposed legislation has various effective dates (including the date of enactment) for different provisions, so clients should be encouraged to implement estate planning strategies as soon as possible. However, clients must understand that the legislation could have retroactive effective dates and such planning may not be successful and could create other negative tax consequences.
Given the Above Uncertainty, Flexibility in Planning is Critical
Considering the ever-changing political environment, you need to plan for many contingencies with respect to tax planning. For example, there may be (1) higher or lower federal income taxes, (2) modification or elimination of the Affordable Care Act Net Investment Income taxes, (3) modification of transfer taxes (e.g., estate, gift and generation-skipping taxes), and/or (4) unanticipated changes, etc. Because of the current state of politics, you and your advisors need to understand the potential outcomes under higher, lower, or similar tax rates. While tax rates are likely to change, income and/or deductions may be limited or excluded under new legislation. Given the potential changes over the short- and long-terms, traditional financial, estate and tax planning may become a year-round endeavor focusing on flexibility and multiple year planning.
You and your advisors should consider all facts and circumstances (e.g., market risk and company risk, time horizons, low interest rates, tax issues, geopolitical risks, etc.), regarding any course of action. In other words, relying solely on a projected tax outcome does not generally result in the optimal financial outcome. Finally, even if President Biden’s proposals and Senator Sanders’ estate tax bill never become effective, the sunset provisions of most of the TCJA applicable to individuals are around the corner.
I hope this information is helpful. If you would like to discuss any of the items, please do not hesitate to call.
Very truly yours,
The Family, Wealth & Legacy Team