Although I am writing this in early April, I promise you, this is no April Fools’ Day joke. There are many potential tax law changes on the horizon, but today I will address two of the most recent proposals.
On March 25, 2021, Senators Bernie Sanders (D-VT) and Sheldon Whitehouse (D-RI) introduced what they call the “For the 99.5% Act.” The title refers to the authors’ attempt to make the estate tax system more progressive so that it will result in a stronger economy for 99.5% of Americans, only impacting the top 0.5%.
Under current law, the estate and gift tax lifetime exemption amount is $11.7 million per person, with amounts transferred in excess of this amount (not including annual gifts of $15,000 per person) subject to a 40% tax. The exemption is currently unified, meaning amounts not used via gifts during one’s life can be applied to their estate upon death. The current exemption levels were doubled by the Tax Cuts and Jobs Act (TCJA) of 2017, and are expected to “sunset,” or return to pre-TCJA 2017 amounts at the end of 2025.
Some of the most significant provisions of the 99.5% Act are as follows:
- Reduce the estate tax exemption amount to $3.5 million per person but continue to index it for inflation.
- Reduce the gift tax exemption to $1 million per person (the system would no longer be unified).
- Increase the estate and gift tax rate from its current flat 40% rate to:
- 45% of an estate between $3.5 million and $10 million.
- 50% of an estate between $10 million and $50 million.
- 55% of an estate between $50 million and $1 billion.
- 65% of an estate over $1 billion.
- Eliminate valuation discounts for non-business assets.
- Eliminate the use of “Defective Grantor Trusts.”
- Restrict the funding of Grantor Retained Annuity Trusts (GRATs) and impose a minimum term of 10 years.
- Limits on “Dynasty Trusts” while also imposing a maximum term of 50 years.
- Reduce the annual gift tax exemption (as mentioned above) from $15,000 per donee per year to $10,000 per donee per year.
On March 29, 2021, Senators Chris Van Hollen (D-MD), Corey Booker (D-NJ), Elizabeth Warren (D-MA), Bernie Sanders (D-VT), and Sheldon Whitehouse (D-RI) introduced what they call the Sensible Taxation and Equity Promotion (STEP) Act.
Under current law, when a property owner passes, the cost basis of property would “step up (or potentially, down),” being adjusted to its Fair Market Value (FMV) at the date of death. When gifting appreciated property, cost basis would carry over to the recipient.
Some of the most significant provisions of the STEP Act are as follows:
- Property transferred by gift or bequest (or to a non-grantor trust) is treated as sold for its FMV, with the gain (or loss, but only if transferred via bequest) being recognized currently. There would be a $100,000 exclusion for gifts, and a $1 million exclusion (less any exclusion used previously for gifts) for transfers at death. Some good news is that you would have 15 years to pay the tax.
- The exclusion of up to $250,000 per person on the sale of a principal residence would continue.
- All non-grantor trusts would have to pay tax on unrealized gains every 21 years (although, trusts created in 2005 or earlier would have their first “deemed realization” in 2026).
- Gifts or bequests to spouses or charities would be exempt.
Although there had been concerns that any new tax legislation would be made retroactive to January 1, 2021, the effective date of these proposed changes would be January 1, 2022.
As can be seen, the proposed tax legislation could impact many Wealthspire client families, and potentially quite significantly. Regardless of whether the two proposals become law in their current form, the magnitude and proportion of tax and tax rate changes expected in the near future continue to become more clear.
Please do not hesitate to reach out to your Wealthspire advisor with any further questions or concerns.