Although it is nowhere close to becoming law, on March 25th, Senators Sanders and Whitehouse proposed a bill which would make important changes to the current federal estate and gift tax system.
The bill proposes the following key changes:
- Reduces the estate tax exemption amount from the current $11,700,000 to $3,500,000.
- Reduces the gift tax exemption amount to $1,000,000.
- Increases the estate tax rate from the current 40%. The rate would be 45% from $3,500,000 to $10,000,000, 50% for the next 40,000,000, 55% for the next $950,000,000 and to 65% thereafter.
- Limits annual exclusion gifting in certain circumstances to $30,000 per donor.
- Provides that a grantor trust for federal income tax purposes (funded or transacted after enactment of the changes) will be subject to estate tax on the grantor’s death. The use of grantor trusts is one of the primary tools used by estate planners.
- Provides that a grantor retained annuity trust (GRAT) must have a minimum 10-year term and a minimum gift value on funding of at least $500,000 or 25% of the fair market value of contributed assets. These changes would make GRATs significantly less attractive.
- Eliminates discounts for interests in family non-business entities.
Under this bill, most (but not all) of these changes would not occur until January 1, 2022.
Additionally, on March 29th, Senator Warren and others introduced a proposal to significantly alter “step up in basis” at death. This proposal would result in taxation on unrealized appreciation at death (in excess of $1,000,000). Further, this proposal would be retroactive to January 1, 2021.
Of course, we cannot predict whether any portion of these proposals will ultimately be enacted but are concerned that some form of transfer tax legislation may be enacted this year.
Last year, our attorneys discussed strategies with clients in order to “lock in” these higher exemption amounts by making gifts in 2020. Some clients, however, decided not to pursue these strategies. These clients may want to contact us to discuss the most appropriate course of action. Of course, we have no way to know if there will be tax law changes made in 2021 or if such changes might be effective on the date of introduction of the bill, the enactment date or January 1, 2022 or retroactive to January 1st.