• New tax proposal by Democrats would dramatically alter estate tax landscape—On March 25, 2021, Senator Bernie Sanders and other Democratic senators introduced to Congress the For the 99.5 Percent Act (the Act) aimed at estate-planning techniques used by the top 0.5% to reduce their transfer taxes. If passed, the Act would cause sweeping changes to the current estate, generation-skipping transfer (GST) and gift tax regime. Many key provisions of the Act would be effective on its date of enactment; the balance would be effective after Dec. 31, 2021.
Estate and GST tax exemptions. The Act reduces the estate and GST tax exemptions to $3.5 million, not indexed for inflation. This would be effective for decedents with a date of death and lifetime transfers on or after Dec. 31, 2021. The last time estate and GST tax exemptions were $3.5 million was in 2009.
Gift tax exclusion. The gift tax exclusion would be reduced to $1 million, so it would no longer match the estate and GST tax exemption (proposed to be $3.5 million each). This proposal would take effect on Jan. 1, 2022.
Tax rates. The Act proposes a graduated structure for tax rates and overall rate increases. Estates over $3.5 million but under $10 million would be subject to a 45% tax rate; over $10 million would be taxed at 50%; over $50 million would be taxed at 55%; and over $1 billion would be taxed at 65%.
Reduced valuation discounts. The Act proposes significant reductions in the discounts, such as lack of marketability, which would be applicable to family-owned entities. In addition, non-business assets (for example, excess cash) held in an entity would be valued as if they were transferred directly to the donee, without any consideration to the entity in which they’re held.
Zeroed-out and short-term grantor retained annuity trusts (GRATs) eliminated. GRATs would be required to have a term of at least 10 years, and the remainder interest would have to be at least equal to the greater of: (1) 25% of the fair market value of the assets; or (2) $500,000. These restrictions would apply after the date of enactment.
Grantor trusts and insurance trusts included in taxable estate. The Act would include the assets in a grantor trust established after the date of enactment in the grantor’s estate, reduced by the value of any gifts made to the trust. This appears to include all post-gift appreciation and income in the estate. This would apply not just to trusts established after enactment but also to transfers made after the date of enactment to pre-existing trusts. Critically, this would cause a portion of insurance proceeds to be includible in the grantor’s estate if premium payments were made after the date of enactment for policies held in pre-existing irrevocable life insurance trusts.
GST trusts. After the date of enactment, GST tax-exempt status would only last for 50 years for trusts. The 50-year period would apply to all existing trusts, starting with the date of enactment (or the date of the trust, if after). At the end of the 50-year period, trusts will have an inclusion ratio of one, meaning that all distributions to beneficiary(ies) two generations or more below the transferor will be subject to GST tax.
Crummey rights and annual exclusions. The Act keeps the annual exclusion intact for a donor’s transfers to individual donees, but it would effectively eliminate the effect of Crummey withdrawal rights to use annual exclusions for multiple beneficiaries in trust. Instead, the Act provides for a simple annual exclusion cap of $30,000, total, for transfers to the trust by a donor regardless of beneficiaries’ Crummey withdrawal rights.
