US connected private clients could be substantially affected by US estate and gift tax proposals introduced in the last week of March 2021. The proposals would change the gift and estate tax exemption amounts and rates and meaningfully impact trust planning.
The ‘For the 99.5 Percent Act’ bill was introduced by Senate Budget Chairman Bernie Sanders on 25 March 2021 with headline proposals including:
- reducing the estate tax exemption amount from $11.7 million to $3.5 million
- reducing the gift tax exemption amount from $11.7 million to $1 million
- increasing estate and gift tax rates from a top rate of 40% to 65% as follows: 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 and 65% of the value of an estate over $1 billion
- limiting the annual gift tax exclusion to no more than $20,000 per donor for transfers to trusts, transfers of interests in a pass through entity (e.g. limited partnership or limited liability company) or interests subject to a prohibition on sale and transfers of property that cannot be immediately liquidated by the recipient
- generally eliminating valuation discounts for lack of control and marketability for transfers of interests in family owned or controlled entities and create further restrictions on valuation discounts for transfers of interest in entities with no business assets
- disallowing a basis step up at death for assets held by a grantor trust unless such assets are included in the decedent’s estate for estate tax purposes
- generally providing that the person who is treated as the grantor and owner of a trust for income tax purposes will have the trust assets included in their estate for estate tax purposes
- treating distributions to beneficiaries from grantor trusts as gifts
- effectively requiring newly created grantor retained annuity trusts to have a term of at least 10 years and an initial gift tax value of at least 25% of the amount transferred to the trust
- generally subjecting transfers from trusts lasting more than 50 years to generation skipping transfer taxes, including subjecting existing trusts to this treatment after 50 years from the date of enactment of the legislation.
Several days later, further estate and gift tax legislative proposals (known as the ‘STEP Act’) were introduced by Senators Chris Van Hollen, Corey Booker, Bernie Sanders, Elizabeth Warren and others, focusing on changing current provisions which generally provide income tax free basis step-up upon an owner’s passing and instead created a deemed sale upon death or gift. Key elements of this proposal include:
- assets generally being deemed to be have sold at fair market value when transferred by gift, bequest or to a non-grantor trust with tax due on such deemed sales
- a $1,000,000 exclusion for these deemed gains at death
- but only $100,000 of this exclusion amount would be available for lifetime gifts
- special provisions would apply to trusts: property transferred to grantor trusts would not generally be treated as sold at the time of the transfer; property in grantor trusts generally would be deemed sold when transferred to another person, the grantor dies or the grantor is no longer treated as the owner of the trust for income tax purposes; further, property held by grantor trusts would be deemed sold where such property ceased to be included in the individual owner’s estate for estate tax purposes; and property held by non-grantor trusts would be deemed to be sold every 21 years
The proposed effective date for most of the provisions in The 99.5% Act would be the date the legislation is enacted (with certain of the provisions related to the change in estate and gift tax exemption amounts and rates not taking effect till 1 January 2022). The proposed effective date for STEP Act is January 1, 2021.
While it may be unlikely that either of these proposals will be enacted in their current form, given President Biden’s infrastructure spending proposals, the need for corresponding tax offsets and the budget deficit position more generally, it is entirely possible that modified elements of these proposals could be enacted in due course.
If you would like to discuss how these proposals might affect you and your planning opportunities please get in contact with your usual Withers contact, the author of this article, or email firstname.lastname@example.org.