Bills recently introduced in Congress will drastically affect private wealth planning if passed in their original forms. While it is simply too soon to predict which, if any, new estate and gift tax legislation may become law in 2021, these developments are significant. Although this Client Alert provides a brief summary of some of these current legislative proposals, it does not constitute legal advice, and we encourage our clients to reach out to the Reed Smith lawyer with whom they regularly work immediately to discuss potential impacts as advice will substantially depend on the circumstances and objectives of the individual client.
If passed into law, the For the 99.5% Act,1 introduced in the U.S. Senate on March 25, 2021 by Senator Bernie Sanders, would do the following:
- Beginning in 2022, gift and estate tax rates (currently a flat rate of 40 percent) would increase to 45 percent for amounts between $3.5 million and $10 million, 50 percent for amounts between $10 million and $50 million, 55 percent for amounts between $50 million and $1 billion, and 65 percent for amounts above $1 billion. The GST rate (currently 45 percent) would be increased to 65 percent.
- Beginning in 2022, the lifetime gift exemption would be reduced to $1 million (currently, $11.7 million) and the estate and GST exemption (currently $11.7 million) would be reduced to $3.5 million. All exemptions would not be adjusted for inflation.
- Beginning on the date of enactment, no valuation discounts would be allowed for any entity’s “non-business assets,” irrespective of family ownership or control, and lack of control and lack of marketability discounts would be disallowed for either entities that are controlled by family members or entities in which family members own a majority of value.
- Beginning on the date of enactment, the gift tax annual exclusion (currently $15,000 per donee) would be capped in the aggregate amount of $30,000 per donor on certain annual exclusion gifts such as gifts of interests in pass thru entities and gifts in trust.
- Grantor retained annuity trusts (GRATs, a currently popular wealth transfer technique) created on or after the date of enactment would be required to have a minimum term of 10 years and a remainder value of at least the greater of $500,000 or 25 percent of the value of property contributed to the GRAT but not more than the fair market value of the gift property in trust.
- The ability after the date of enactment to create trusts that are exempt from the generation-skipping transfer tax (GST tax) would be available only if the trust terminated within 50 years of creation.
- Generation-skipping exemptions allocated to trusts created prior to the date of enactment (which made such trusts exempt from GST tax) would lose that benefit effective 50 years after the date of enactment.
- Grantor trusts (namely, trusts where the grantor is treated as an owner for income tax purposes) created, or contributions made to grantor trusts, after the date of enactment would be subject to estate tax at the grantor’s death, and in the event distributions were made from the trust during the lifetime of the grantor, or grantor trust status were turned off, the grantor would be subject to gift tax.