Recently introduced legislation suggests that the US Congress is interested in increasing taxes on high-wealth individuals. While none of these bills have made significant advancements in the legislative process yet, individuals whose wealth could be impacted should pay attention to potential changes, particularly to estate law. Significant revisions to tax rules could require you to rethink your estate plans.
Here are two recently introduced bills to keep track of and how they could impact you.
The 99.5 Percent Act
Sen. Bernie Sanders introduced this bill on March 25, and if passed, changes to estate and gift tax law would take effect on December 31. According to Jonathan Blattmachr, principal in ILS Management, LLC, this bill and others like it could “rock the world of every estate planner.”
In a nutshell, this bill, which is aimed at the top .5 percent of wealthy Americans, would expand the number of estates eligible to pay estate tax and would increase the amount of taxes each estate would pay.
Here are the primary changes the bill would enact.
- Reduce the US federal estate tax exemption from $11.7 million to $3.5 million (although the current limit will sunset to just less than $6 million in 2026).
- Reduce the US federal gift tax exemption from $11.7 million to $1 million.
- Increase the progressive federal gift and estate tax rate from 40 percent to 65 percent. To break it down, the rate will increase to 45 percent for excess value over $3.5 million, 50 percent for excess value over $10 million, 55 percent for excess value over $50 million, and 65 percent for excess value over $1 billion.
- Institute a limit of 50 years on generation-skipping trusts, also known as GSTs or dynastic trusts.
- Allow a $10,000 annual gift tax exclusion per recipient with a cap of $20,000 per donor.
- Limit minority-interest discounts when valuing some non-business assets for transfer for gifts and estate taxes.
- Require a 10-year minimum and 25 percent minimum value for remainder interest for grantor retained annuity trusts.
The proposed changes also would add Code 16 to the law, a new section outlining rules for transferring taxation of grantor trusts in the cases of gift and estate transfers and transfers that skip a generation.
Earlier this year, Sanders along with Sens. Cory Booker and Elizabeth Warren introduced the Sensible Tax and Equity Promotion Act. More commonly called the STEP Act, the overall goal of this legislation is to get rid of a loophole that allows people who inherit property not to pay capital gains tax on the property’s increase in value.
Currently, when someone inherits property, its value is “stepped up” to the current market value. Beneficiaries can take advantage of this loophole by immediately selling the property at market value without paying capital gains tax on the increase in valuation. However, if someone keeps the property for several years before selling it, they will be required to pay capital gains on any value the property has added since it was inherited.
This system will change if the STEP Act is enacted. If the property had increased in value, the new law would require the estate to pay capital gains taxes on that increase over the first $1 million in appreciated assets (increases in value less than $1 million would not be taxed). Beneficiaries who inherit a farm or business could spread their estate tax payments under the STEP Act over 15 years. All taxes paid on an asset’s increase in value would be deducted from the estate tax.
Impact on Estate Planning
The Joint Committee on Taxation estimates that the untaxed step-up will cost the US almost $42 billion in revenue in 2021. It also notes that for estates valued at more than $100 million, more than 55 percent of the wealth comes from untaxed capital appreciation.
If these bills are signed into law, estate planners predict they will create significant change for beneficiaries of estates and in the way estates are managed. Many predict it will make the paperwork and administration of estates much more complex, primarily because the historical tax basis for assets will have to be determined. With this anticipated increase in work, estate planners recommend making appointments now to work on your estate and enact your plan before new laws are passed. Otherwise, the demand for services may mean you’ll have to wait to meet with financial professionals.
Analysts aren’t sure yet whether these bills will make any progress in Congress, but because Democrats control Congress, some or all of these changes could become law. Passing the bills would require 50 votes in the Senate, which may be difficult given the legislating body is evenly split between Democrats and Republicans. Regardless, it’s likely that significant changes could be coming to estate tax law, and the best way to prepare is to stay in touch with your financial professional and begin discussing adjustments and changes you’ll need to make to your estate if these proposed rules become law.