“There’s no trick to being a humorist when you have
the entire government working for you.”
—Will Rogers
Will Rogers may have had it right. Below is an update of the effects of the Democrat controlled House, Senate and Executive branches on the federal estate and gift tax. Earlier this year Sen. Sanders (I-VT) introduced legislation called “for the 99.5% Act.” Whether we agree with the target or the appropriateness of the name is beside the point. What the proposed legislation (“Proposal”) contains should actually be of concern to everyone who has assets in excess of $1.0MM.++ /ᵸᵸYou may recognize some of the below issues, others of them you may not. Either way, we are happy to discuss them with you.
The chief elements of the Proposal are as follows:
- A reduction in the lifetime estate tax exemption amount from the current $11.7MM per person to $3.5MM per person.
- A reduction in the lifetime gift tax exemption amount from the current $11.7MM per person to $1.0MM per person.
- Estate and Gift tax rate increase: from the current 40% to the following: $3.5 – 10 MM 45%; $10 -50 MM $50%; 50 – 1,000MM 55%; > $1,000MM 65%.
- A capital gain payable on assets transferred at death or during life by gift. Sen. Van Hollen (MD) has offered a proposal that would tax all assets in excess of $1.0MM passing from one person (at death or during life) to another at capital gains rates. The automatic step up in basis at death would be eliminated. Payment of the capital gains tax would secure the step up in basis at death. Proposed effective date is retroactive to January 2021. Note the tension in current year planning if this proposal is adopted.
- A reduction in the annual gift tax exemption from $15,000 per person, per donee to an annual per donor maximum of $20,000 per year. This could have significant implications for current irrevocable life insurance trusts funded with annual gifts.
- A restriction on the establishment of new irrevocable life insurance trusts.
- Except as noted above, the Proposal would make these changes effective January 1, 2022.
- The Proposal suggests a 50 year maximum for trusts, effective on the date of enactment.
- A minimum term of 10 years for grantor trusts, effective on the date of enactment.
- Minimum remainder interest of 25% of initial FMV of assets contributed to a GRAT, effective on the date of enactment.
- Assets in a grantor trust established after the date of enactment are includible in a donor’s estate.
- A limitation or elimination of the minority ownership/lack of control discount taken for gifts of closely held business interests to family members, made after the date of enactment.
- Possible elimination of Section 1031 like kind exchanges, or, as an alternative, ending like kind exchanges for gains in excess of $500,000.
If you have an existing life insurance trust, a GRAT or have been in discussions regarding a sale to a grantor trust, you should contact your lawyer at Thomas & Libowitz soon. It may be too late to effectively implement any estate and gift tax planning, then again, maybe not. I know that sounds ridiculous, but we really do not know what will happen with the proposed legislation. What we do know is that the current Congress is serious about the proposals. You can reach Charles Jones at 410-752-2468.
++ Not including the value of personal residences, there are approximately 11.8 million people with a net worth in excess of 1.0 MM Dollars. This amounts to 3% of the U.S. households. If one includes the value of personal residences and family farms, that number increases considerably. In California alone, the average value of a residence in 2021, as calculated by Zillow™, is $644,000.
ᵸᵸ “To be top .5% in 2020, a household needed a net worth of $17,557,208. The top .1% bracket started around $43,207,732” [ https://dqydj.com/average-median-top-net-worth-percentiles/ ].