After the spending spree necessitated by the Coronavirus (think CARES Act, stimulus payments, vaccine development support, etc.), coupled with President’s Biden infrastructure building plans, it is not surprising that Congress has turned its focus toward revenue raising as we emerge from the pandemic. Revenue raising proposals usually mean finding a way to collect more tax dollars. At the end of March, Senators Bernie Sanders and Sheldon Whitehouse introduced a bill they call, “For the 99.5 Percent Act” which proposes sweeping changes to existing estate and gift tax laws. Read on for five of the most significant proposed changes.
- Reduce the current $11.7 million federal ESTATE tax exemption to $3.5 million. For the vast majority of Americans, the federal estate tax (the ‘death tax’) has been a non-issue since 2010 when the exemption was raised to $5 million and indexed for inflation. The exemption is the amount that each person is permitted to pass on free of any federal estate tax at death. Because $5 million was not high enough for some people, the exemption was increased to $11 million under President Trump, albeit with a sunset provision that reduced the exemption back to $5 million at the end of 2025. The Sanders/Whitehouse proposal calls for rolling that exemption back to $3.5 million and indexing it for inflation. While this rollback (if it happens) will mean that more estates will be subject to federal estate tax, the vast majority of estates will not be impacted because most Americans do not have an estate worth more than $3.5 million ($7 million for a married couple). Those folks whose estate is more than the proposed reduced exemption amount should keep an eye on this legislation and explore their options for undertaking some planning before the end of 2021.
- Increase the rate of taxation on federally taxable estates. Under the current federal estate tax law, taxable estates which exceed the exemption are subject to tax at the flat rate of 40%. That means that on a $20 million estate there will be federal estate tax payable of $3,320,000 ($20 million – $11.7 million x .40). Under the Sanders/Whitehouse proposal, the estate tax rate would be increase to 45% for taxable estates valued between $3.5 million and $10 million, 50% for estates over $10 million but less than $50 million, 55% for estates between $50 million and $1 billion, and 65% for estates over $1 billion. While these rates are super high, the number of estates subject to them will be very small.
- Limit total annual exclusion gifts to two-times the amount of the annual exclusion. The annual exclusion amount is the amount that each person may gift to any number of people in any calendar year without having to file a gift tax return and without reducing that person’s lifetime gift tax exemption. In 2021 that amount is $15,000 (a base amount of $10,000 indexed for inflation). For example, under the current law, I can give up to $15,000 to each of my two children, to my seven nieces and nephews, to my two siblings, and to my mailman, if I am so inclined, without any impact on my lifetime gift tax exclusion. There is no limit on the number of people to whom I can gift up to $15,000 in any calendar year. To the extent I give more than $15,000 to any one person in any one calendar year, I will ‘chip-away at’ my lifetime gift tax exemption. For example, if I gave my child $115,000 during the year, I will have made an excess gift of $100,000. This will reduce my lifetime exemption from its current $11.7 million to $11.6 million ($11,700,000 – $100,000 = $11,600,000).Under the proposed law, annual exclusion gifts would be limited to two-times the amount of the annual exclusion. That means that if the annual exclusion amount is $15,000, I could give each of my two children $15,000 in one year but could not give any other gifts in that year without reducing my lifetime gift tax exemption.
- Reduce the current $11.7 million lifetime GIFT tax exemption to $1 million. Under the current federal gift tax law, each person has an $11.7 million lifetime gift tax exemption, which is the amount they can give away during their lifetime before any gift tax must be paid. The proposed law would reduce the gift tax exemption to $1 million, meaning that cumulative excess gifts of more than $1 million during someone’s lifetime will incur gift tax. The reduction of the gift tax annual exclusion amount coupled with the proposal to reduce the federal gift tax exemption from its current $11.7 million to $1 million is likely to significantly curtail estate tax planning in the future if these provisions are enacted, since tax planning done to reduce the size of your taxable estate often involves gifting assets. People who have large estates and who want to undertake planning to reduce their federal estate tax should do so before the end of 2021 in order to take advantage of the current $11.7 million gift tax exemption amount, which will be reduced to $1 million under the new law.
- Limit generation-skipping transfer trusts to a term of 50 years. The generation skipping transfer tax (GSTT) is a tax imposed on transfers to ‘skip’ beneficiaries (think grandchildren). The GSTT is in addition to the federal estate tax and is assessed at the same high rate. In order to mitigate the harshness of the tax, there is an exemption from the GSTT which is currently equal to the amount of the federal estate tax exemption. That means that under the current law a person with an $11.7 million estate could leave his entire estate to his grandchildren and there would not be any GSTT payable. Typical GSTT planning involves creating trusts for multiple generations to shelter family wealth from diminution from the estate tax. In this way, the inheritance from grandpa may escape estate taxation for 100+ years, preserving family wealth for future generations. The Sanders proposal would limit the term of such trusts to 50 years, requiring the payment of estate tax every 50 years.
The above changes are only proposals and we don’t know what the final law will be. The revenue raising plan submitted by President Biden does not contain these provisions so perhaps none of them will be enacted. However, if you have an estate that you anticipate would be subject to federal estate tax if these proposals are enacted, and if you are interested in exploring options for reducing the tax in the event one or more of th`ese proposals become law, you should take action soon.
Attorney Suzanne R. Sayward is a partner with the Dedham law firm of Samuel, Sayward & Baler LLC which focuses on advising its clients in the areas of estate planning, estate settlement and elder law matters. She is certified as an Elder Law Attorney by the National Elder Law Foundation, a private organization whose standards for certification are not regulated by the Commonwealth of Massachusetts. This article is not intended to provide legal advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney. For more information visit our website at www.ssbllc.com or call 781/461-1020.
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