For the 99.5% Act: Key considerations and next steps

Since Jan. 20, 2021, many have been closely watching Washington for signs of anticipated tax legislation. Because of President Biden’s preelection statements on taxation and the extensive federal stimulus spending, most anticipate this legislation will contain changes to many of the income, estate, and gift tax rules and may also roll back some of the cuts included in the 2017 Tax Cuts and Jobs Act (TCJA). One of the most impactful changes for many families would be a decrease in the estate and gift tax exemption.

On March 25, 2021, the first indicator of these changes came in the form of a bill put forth by Senator Bernie Sanders (VT) and Senator Sheldon Whitehouse (RI) titled, “For the 99.5% Act.” Per Sanders, the title refers to the bill’s attempt to put a progressive estate tax system in place that will result in a stronger economy for 99.5% of Americans, only affecting the top 0.5% of Americans.

One of the most impactful changes for many families would be a decrease in the estate and gift tax exemption.

As a reminder, the current estate and gift tax exemption is $11.7 million per person; amounts transferred to heirs above this exemption are subject to a 40% tax. This exemption is currently unified, in that amounts not used via gifts made during lifetime can be applied against the estate tax upon passing. This exemption level was doubled by the TCJA and is scheduled to revert to the previous exemption level of half this amount on Jan. 1, 2026.

Some of the more significant provisions of for the 99.5% Act include:

• Reduction of the estate tax exemption amount to $3.5 million per person; $7 million for a married couple. The exemption would continue to be indexed for inflation.
• Reduction of the gift tax exemption to $1 million per person; therefore, the system would no longer be unified and would be more limited in the amount that can be transferred during one’s lifetime.
• Change in the estate and gift tax rate from a flat 40% rate to a progressive system 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
  • 65% of the value of an estate in excess of $1 billion
• Elimination of valuation discounts for nonbusiness assets, such as family-owned limited liability companies funded with investment assets.
• Elimination of what are commonly referred to as “Defective Grantor Trusts” by adding a provision to the Internal Revenue Code stating that a trust funded by a grantor after the date of the legislation is considered owned by the grantor for both income and estate tax purposes.
• Restrictions on funding of new GRATs (Grantor Retained Annuity Trusts), imposing a minimum term of 10 years and minimum gifts upon funding.
• Limitations on “dynastic” trusts that are intended to go on for multiple generations by requiring the trust to terminate for estate tax purposes after 50 years.
• Changing the annual gifting exemption (currently $15,000 per donee per year) to $10,000 per donee and adding an annual cumulative limitation per donor of two times the annual limitation. Limitations are also put in place when making gifts to trusts, family entities, or other entities where the assets can’t be immediately liquidated.

One item not included in the proposal, even though President Biden suggested it previously, was the elimination of step-up in basis of assets includable in the estate upon passing. There is language protecting farmland and conservation easements, which continue to be sensitive issues when changes to the estate tax system are considered. While it’s important to note that these are only proposals, they may be indicators of the types of changes that could be pursued. Although there has been previous concern that tax legislation would be made retroactive to Jan. 1, 2021, the effective date of these proposed changes is on Jan. 1, 2022. Whether tax legislation is put in place as of the date of signing, or effective as of Jan. 1, 2022 as this proposal suggests, it provides an opportunity for families to take advantage of the still-elevated exemption, GRATs, and other wealth transfer techniques that may be impacted by future legislation. Those potentially impacted should connect with their advisors to discuss and complete such transactions in the near term, before tax legislation limits many of these wealth transfer opportunities.

An opportunity exists for families to take advantage of the still-elevated exemption, GRATs, and other wealth transfer techniques that may be impacted by future legislation.

For information about how changes to the estate tax exemption could affect your estate plan, contact your PMFA wealth management advisor.