While still a long way from becoming law, the far-reaching “For the 99.5 Percent Act” introduced into the U.S. Senate could have a considerable impact on generational wealth transfer, and thus on estate planning. The legislation includes a number of provisions that would affect everything from estate tax exemptions, to gift tax rates, to how trusts are structured. The name of the Act, according to one of its sponsors, Sen. Bernie Sanders of Vermont, is in reference to the estimated 99.5 percent of Americans who would not be affected by changes to the estate tax system.
But what about the 0.5 percent who would be impacted? Among the most significant changes the Act would make on the estate planning landscape include:
- Separating lifetime estate tax from gift tax exemptions.
- Returning the lifetime estate tax exemption rate to 2009 levels of $3.5 million per individual and $7 million for a married couple. The current exemption amounts are $11.7 million per person and $23.4 million per couple. (The lower exemption amounts would continue to be indexed for inflation.)
- The gift tax exemption would be reduced to $1 million per individual.
- The estate and gift tax rate (currently a flat 40% for all amounts over the allowable exemptions) would be changed to a progressive system, as follows:
- 45% on estates valued between $3.5 million and $10 million
- 50% on estates valued between $10 million and $50 million
- 55% on estates valued between $50 and $1 billion
- 65% on estates valued at more than $1 billion
- Valuation discounts on nonbusiness family assets would be eliminated.
- Virtually eliminating Intentionally Defective Grantor Trusts by making a trust funded by a grantor is considered owned by the grantor for both income and estate tax purposes.
- Restricting the funding of new Grantor Retained Annuity Trusts (GRATs) by imposing a minimum term of 10 years and minimum gifts upon funding.
- Limiting multi-generational “dynastic” trusts by requiring the trust to terminate (for estate tax purposes) after 50 years.
- Limit the annual gift tax exclusion up to no more than $20,000 per donor for certain types of transfers, such as transfers to trusts.
- New limitations on gifts to trusts, family entities, or other entities where the assets can’t be immediately liquidated.
The For the 99.5 Percent Act has a long way to go in Congress before becoming law, although it does fit in with the changes discussed by President Biden during the campaign. However, it does not appear that the changes, if enacted, would be made retroactive. The Act, as written, is slated to take effect on January 1, 2022.
Although this is almost immediate in terms of tax legislation, it does give taxpayers who might be impacted by the Act a limited time to take advantage of higher exemptions, GRATs and other wealth transfer techniques that could be impacted by the legislation. Those potentially affected should work with their trust and estate advisors to evaluate the potential impact and complete such transactions in the near term, before tax legislation imposes limits on many of these wealth transfer opportunities.
Melissa E. Sydney is a Partner and Chair of the Estate Planning & Administration practice group at Tarlow Breed Hart & Rodgers, P.C. in Boston, Mass. Attorney Sydney can be contacted at (617) 218-2031, or via email at firstname.lastname@example.org.