A new piece of legislation filed in the U.S. Senate – the “For the 99.5 Percent” Act – could have a significant impact on gift and estate planning. According to the sponsors of the bill, its name describes the “99.5 percent” of the population who are unlikely to be affected by the proposed changes.
It is important that the “other 0.5 percent” who are likely to be affected know what the proposed legislation entails and how it might make changes to estate planning necessary. Unlike typical tax legislation, this Act has the potential to be fast-tracked and could take effect by the end of this year. Included in the legislation’s most important provisions are:
- Gift and estate tax exemptions will be reduced. The estate, gift and generation-skipping tax exemption, which is currently set at $11.7 million per individual, would be reduced to $3.5 million for estate taxes and $1 million for gift taxes. Under the legislation as it currently is written these changes would take place for deaths recorded and gifts made after December 31, 2021.
- Gift and estate tax rates will increase. The current maximum gift and estate tax rate of 40% would be replaced by a progressive tax structure:
- Estates valued between $3.5 million and $10 million would be taxed at 45%
- Estates valued between $10 million and $50 million would be taxed at 50%
- Estates valued between $50 and $1 billion would be taxes at 55%
- Estates valued at more than $1 billion would be taxed at 65%
- Generation skipping taxes would be set at the highest rate of 65%
- Tighter limits on annual gifts. Under current tax laws an individual can make gifts of up to $15,000 per year, per individual done, with no limit to the number of individuals. The new law would limit this exemption.
- Intentionally defective irrevocable grantor trusts (IDIGTs) may be curtailed. Assets in a grantor trust will be included in the grantor’s estate (unless the trust is grandfathered), distributions from a grantor trust during the life of the deemed owner would be considered a gift, and the assets of a grantor trust will be a gift if the grantor status is “turned off” during life. In addition, assets in IDIGTs would no longer receive a step-up in basis upon death.
- Discounted valuations will no longer be allowed on nonbusiness assets. Instead, nonbusiness assets would be valued as if they were being transferred directly to the person who receives the asset. (An exception will be made for real estate activities where there is material participation of 750 hours of active and continuous engagement.)
- “Perpetual trusts” will be limited to 50 years. Multi-generational trusts would now have a 50-year term limit from the date on which it is created. This will also apply to existing trusts. Any trusts with a term of more than 50 years will have an inclusion ration of one, meaning distributions to a generation-skipping individual will be subject to the highest applicable tax (which would be 65% under the new Act).
- GRATs may be gone. Grantor Retained Annuity Trusts (GRATs) will be required to have a minimum term of 10 years and a maximum term of the life expectancy of the annuitant plus ten years. This may eliminate their effectiveness for estate planning purposes.
What does this mean for estate planning purposes? None of this is written in stone. The For the 99.5 Percent Act has just started its journey through the legislative process. But changes to the tax laws – especially gift and estate taxes – were a part of President Biden’s campaign, and the composition of Congress could make it easier to push through tax legislation.
Anyone with assets of $7 million or more could be adversely affected. Many people may wish to take advantage of the higher tax exemptions and maximize gifts before the end of 2021. In some cases (such as with a QTIP trust), if a death of a spouse should occur in 2020 the estate taxes should be paid now instead of being deferred until the death of the surviving spouse. It is essential that you contact a qualified estate tax planning professional to make appropriate adjustments to your own estate plan, and possibly take steps to transfer assets this year.
We will continue to monitor this legislation as it moves through Congress. Please watch for our updates and reports. For additional information please contact Gray, Gray & Gray at (781) 407-0300.