Recently we have seen a flurry of proposed legislation, which if enacted, will bring unprecedented changes to the tax and estate planning landscape.  Although the outcome of the proposed legislation remains unknown, taxpayers who may be affected by the enactment of these laws should review their estate and tax planning documents to determine if changes or updates are warranted.  Below is a summary of the proposed changes in the tax laws.

For the 99.5% Act – Introduced by Senators Bernie Sanders and Sheldon Whitehouse

Effective Date, if adopted: January 1, 2022

Key Changes:

  • Reduction of the estate tax exemption amount to $3.5 million per person ($7 million for a married couple), with the exemption being indexed for inflation.
  • Reduction of the gift tax exemption to $1 million per person. Gift and Estate Tax systems would no longer be unified.
  • Change in the Estate and Gift Tax rates (currently a flat 40% rate)
    • 45% for estates between $3.5 million and $10 million
    • 50% for estates between $10 million and $50 million
    • 55% for estates between $50 million and $1 billion
    • 65% for estates in excess of $1 billion
  • Elimination of valuation discounts for nonbusiness assets, such as family owned LLCs funded with investment assets.
  • Elimination of Defective Grantor Trusts – Trusts created by a grantor after the date of legislation would be considered owned by the grantor for both income and estate tax purposes.
  • Restrictions on funding of new GRATs – minimum 10 year term and minimum gifts upon funding.
  • Limitations on Dynasty Trusts – required termination after 50 years.
  • Reduction of annual gifting exemption from $15,000 to $10,000 per year per donee and subject to a $20,000 per donor cap.

The STEP Act (Sensible Taxation and Equity Promotion Act) – Introduced by Senators Chris Van Hollen, Cory Booker, Bernie Sanders, Sheldon Whitehouse and Elizabeth Warren

Effective Date, if adopted: January 1, 2021 (retroactive)

The STEP act has some similarities to the For the 99.5% Act.  Key changes to the current law that are not included in the For the 99.5% Act:

  • Realization of Gains at time of Gift or Death – in general, property is treated as sold for its fair market value when transferred by gift, bequest or to a non-grantor trust.
  • Income tax paid will be deductible for estate tax purposes. $1 million in unrealized capital gains is excluded from the tax.
  • Property in grantor trusts is treated as sold when transferred to another person, the grantor dies, or the grantor is no longer treated as the owner.
  • Property in grantor trusts is also treated as sold if it would no longer be included in the owner’s estate for estate tax purposes.
  • Property held by a non-grantor trust is treated as sold for its fair market value every 21 years after establishment of the trust.
  • Eliminate carryover basis for gifts, except for spouses and charities.

American Families Plan – Proposal by the Biden administration

Key Changes:

  • Raise the top marginal income tax rate from 37% to 39.6%. This applies to income greater than $452,700 for single and head of household filers and $509,300 for joint filers.
  • Tax long-term capital gains and qualified dividends as ordinary income for taxpayers with taxable income over $1 million.
  • Tax unrealized gains at death for unrealized gains above $1 million ($2 million for joint filers). No change to be made to the current law regarding capital gains exclusion of $250,000/$500,000 for a primary residence.
  • Limit 1031 Like-Kind Exchanges above $500,000 in deferred capital gains and end the preferred treatment of carried interest.
  • Apply the 3.8% Net Investment Income Tax to active pass-through business income above $400,000.
  • Make permanent or expand certain portions of the American Rescue Plan Act, such as the enhanced Child Tax Credit, the health insurance Premium Tax Credit, Earned income Tax Credit and Child and Dependent Care Tax Credit.

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