On March 25, 2021, Senator Bernie Sanders introduced legislation called “For the 99.5% Act.” It is the first piece of legislation introduced following President Biden coming into office that would lower the federal estate tax exemption. The bill would make the following significant changes to many important federal transfer tax provisions as follows:
- Drastically reduce annual gift tax exclusion to no more than $20,000 per donor for certain types of transfers such as transfers to trusts;
- Reduce the federal estate tax exemption to $3.5 million for U.S. citizens and U.S. domiciliaries;
- Reduce the federal gift tax exemption to $1 million for U.S. citizens and U.S. domiciliaries with an effective date for gifts made after December 31, 2021;
- Increase the progressive federal gift and estate tax rate to 45% for the excess value over $3.5 million, 50% for the excess value over $10 million, 55% for the excess value over $50 million, and 65% for the excess value over $1 billion;
- Disallow a basis step up on death for assets held through a grantor trust, if the assets are not included in the grantor’s gross estate at the time of death;
- Require Grantor Retained Annuity Trusts to have a minimum 10-year term and a 25% minimum value for the remainder interest;
- Eliminate or reduce valuable discounts for transfers of interests in entities such as family limited partnerships that are not conducting an active trade or business;
- Constrain the ability to create dynastic trusts that are exempt from generation-skipping transfer taxes, if the trust period is greater than 50 years; and
- Subject distributions to beneficiaries from a grantor trust to U.S. federal gift tax.
It’s unclear if the “For the 99.5% Act” will gain traction in Congress. With a Democratically controlled Congress and deficits caused by COVID-19, there is a chance that the federal estate tax exemption could decrease. A decrease in the exemption was also a campaign issue for President Biden. Some of the other proposed items have been part of previous proposals but never progressed to proposed legislation. This bill also comes shortly after Senator Elizabeth Warren’s March 1, 2021 proposed legislation, known as the “Ultra-Millionaire Tax”, which proposes a new federal wealth tax. If the “For the 99.5% Act” passes and is signed into law by President Biden, there will be a significant impact on many of the common estate tax planning techniques used by high net worth individuals. It is important to monitor the progress of these proposals and be prepared. The attorneys at Kurre Schneps LLP are skilled in estate tax planning and are available to be consulted.
