05/19/2021
As the proposals from the White House, Senator Sanders, and others formulate, this alert explains how these proposals will more than likely take away the most commonly used strategies for using a remaining exemption. Even though it is still an uncertainty, the key to securing the most effective use of the current higher exemption amounts is swift action. A majority of these proposals would be effective come January 1st of 2022, or even as soon as the proposals are enacted.
Lowering Exemptions
Under Senator Sanders’ “For the 99.5% Act,” and President Biden’s tax proposal, the estate tax exemption would be reduced to $3.5 million per person. Additionally, the gift tax exemption would be reduced to $1 million per person. Given that the current exemption for both the estate tax and the gift tax is $11.7 million, these new exemptions, if enacted, would be substantially lower. The proposed exemptions would even be lower than the $5 million exemption that will return in 2026, barring any changes made by legislation. The White House has proposed raising the top estate tax rate to 45%, and Senator Sanders wants to raise the rate even higher than that for larger estates. Estates ranging between $10 million and $50 million would be taxed at 50%, and estates greater than $1 billion would be taxed at 65%. On top of these much higher tax rates, by lowering the gift tax exemption to $1 million, both plans would greatly reduce the availability for lifetime planning without incurring gift tax liability.
The Step-Up
Additionally, the White House proposal would take away the step-up in basis for assets transferred at death. Another proposal, the Sensible Taxation and Equity Promotion Act, (STEP Act for short) would allow for basis step-up for the first $1 million in unrealized gains, plus an additional $500,000 for a personal residence passed at death. Any other assets would not receive a step-up in basis. This plan would leave taxpayers with 15 years to pay the tax on non-liquid assets. These proposals would increase capital gains liability on beneficiaries significantly. Given that the White House wants to eliminate the preferential 20% tax on long-term capital gains, and tax said gains as ordinary income, this is even more urgent.
Targeting Wealth Transfer Strategies
Not only does Senator Sanders’ proposal just lower the exemption and raise the tax rate on estates and gifts, but his proposal also includes several substantial changes targeting some of the most effective strategies for efficient wealth transfer. Some of those changes are as follows:
1. The proposal calls for a reinstatement of Generation Skipping Transfer taxes on trust that last longer than 50 years, even in situations where the GST exemption has been applied;
2. The proposal calls for a reduction, or even elimination of the ability of non-business entities to take discounts for minority ownership;
3. The proposal calls for a requirement of grantor retained annuity trusts (GRATs) to last a minimum of ten years, which would increase the risk and also reduce the use of these types of trusts; and lastly
4. The proposal would make irrevocable gift trusts severely less efficient. This would be done by eliminating the use of the “grantor trust” rules for this specific type of trust. This proposal would have the beneficiaries, rather than the donor bear the income taxes of the trust’s assets.
Next Steps
Anyone interested in using their full $11.7 million exemption should strongly consider acting quickly. While it is not yet clear exactly which of the aforementioned proposals will become law, most of the current proposals involve lowering the estate and gift tax exemptions to their lowest point in more than a decade. Given this reality, many of the desired plans for passing wealth may be unavailable by as early as the end of 2021, or the start of 2022. Given that everyone’s family situation is unique, the best plan for any situation can take months, so the best time to start preparation is now.
At Singler Law, our expertise in estate planning and administering wealth transfer strategies can help you capitalize on a potential closing window of opportunity.
