Significant Changes to Estate Planning Suggested in the “For The 99.5 Percent Act”

April 8, 2021 | Article

Following along the lines of legislation introduced in 2019, Senator Sanders recently introduced new legislation that provides numerous significant changes, subject to various grandfathering provisions, to the current federal estate and gift tax rules. The new legislation is entitled, “For The 99.5 Percent Act.”

What’s Included in the 99.5 Percent Act?
The Act significantly reduces the federal estate and gift tax exemptions. It also eliminates, as early as the date of enactment, many of the estate planning techniques used by estate planners for several years, while other provision changes would be generally effective as of December 31, 2021.

The estate tax exemption, under the Act, would move to $3,500,000, down from the current exemption of $11,700,000. The Act would also reduce the lifetime gift tax exemption to $1,000,000. Under the Act, the estate and gift tax rates, which currently top out at 40%, are also scheduled to increase to a range starting at 45% to a top rate of 65% for taxpayers with an estate greater than a $1 billion.

Currently, taxpayers can shift a significant amount of wealth using the current annual gift exclusion amount of $15,000 per person. The current annual exclusion is not limited on an annual basis as to the total amount given by a donor, or the amount received by a donee.

However, the Act provides a limit to the annual gift exclusion for certain transfers in trust, passthroughs or other items that cannot be immediately liquidated by the donee. A change such as this could disrupt some current long-term annual gifting plans, such as gifts to Irrevocable Life Insurance Trusts.

Other key provisions of the Act include:

  • Estate inclusion and gift tax triggers related to certain grantor trust structures
  • 50-year statutory limit for GST Trusts
  • Elimination of discounts on family investment entities, such as Family Limited Partnership and Limited Liability Companies
  • Disallowance of select marketability and minority interest discounts
  • Requirement of Grantor Retained Annuity Trusts to have 10-year minimum term and a remainder interest equal to the greater of 25% of fair market value or $500,000.

How will the Act Change the Estate Planning Approach?
Combined, these new provisions, if enacted, could cause significant changes in the approach to estate planning.

In addition, there is limited affect in the Act provisions to address the step-up in basis rules, but other legislation has been introduced that would impose a capital gain upon gifting or upon death.

And, while the content is not yet known, President Biden is expected to release a new proposal aimed at boosting the economy in mid-April. This plan is expected to be called the American Families Plan. It is not clear if changes to the estate tax will be included in the package, and if they are, how those changes will compare to the Act provisions introduced by Senator Sanders.

What Should You Do Now?
The future of the current estate and gift tax exemptions is unclear, but there are still things you can do to prepare:

  • Review your estate documents.
  • If they are already drafted, make sure they are up to date.
  • Work with your business advisor to ensure you have the information you need to make informed decisions about your estate plan from a tax and cash flow perspective.

Considering the higher estate exemption available today and the ability to use some of the estate planning techniques that would be eliminated in the Act, now is the time to talk to your tax and wealth advisor to be sure you understand the tax and cash flow consequences of using your gift exemption during your life while the higher exemptions are available.


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