Be Prepared For Estate and Gift Tax Law Changes
On March 25, 2021, Senator Bernie Sanders introduced legislation called “For the 99.5% Act” or the “Sanders Bill” which would drastically change the federal estate and gift tax law.
The proposed bill would make the following important changes:
Reduce the federal estate tax exemption from $11.7 million to $3.5 million effective 1/1/2022.
Reduce the federal gift tax exemption to $1 million for gifts made after 12/31/2021.
Increase the federal gift and estate tax rates from 40% to 45% - 65% depending on the size of the estate.
Reduce the annual exclusion gifts from $15,000 per donee to a maximum of $30,000 per donor for gifts to certain trusts.
Eliminate grantor trust planning. Grantor trusts created and funded prior to the enactment of the new law would be grandfathered, but grantor trusts created or funded after the enactment date would be included in the estate of the grantor.
Require a minimum term of 10 years for Grantor Retained Annuity Trusts and a 25% minimum value for the remainder interest.
Eliminate valuation discounts for transfers of interests in certain family limited partnerships.
Limit generation-skipping tax exemption of dynasty trusts to 50 years.
A second proposed act - the “STEP Act” would eliminate the step-up in basis of inherited assets over $1 million.
On a positive note, many of the proposed changes would not take effect until 1/1/2022. The current $11.7 million exemption will still be available to individuals who pass away or make gifts prior to 12/31/2021.
If you plan to make gifts prior to the end of 2021 to take advantage of the higher exemption amount, be sure you talk with your estate planner about the impact of gifts on your future estate tax exemption. For example, if you gift $1 million this year and the estate tax exemption is reduced to $3.5 million in 2022, then you will only have $2.5 million of exemption remaining at your death. The only way to guaranty use of the full $11.7 million exemption is to use it in 2021.
If passed, these changes could have a significant impact on your estate tax planning. Estate planning attorneys will be inundated with clients who want to revise their plans before a new law takes effect. If you are concerned about the impact of the proposed legislation on your planning, you should reach out to your advisors now and not at the end of the year when it may be too late to make changes.