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Proposed Estate and Gift Tax Changes Under the Biden Administration Could Be Extreme

by Pam Dennett
May 07, 2021

The Biden administration has suggested a repeal of the Tax Cuts and Jobs Act (TCJA) provisions relating to estate and gift tax. As a result, various proposals are currently being introduced in Congress that could radically change the estate and gift tax regime. This article will focus on the following proposals:

  • The “For the 99.5 Percent Act” introduced by Senator Bernie Sanders on March 25, 2021
  • The “Sensible Taxation and Equity Promotion (STEP) Act of 2021” introduced by Senator Chris Van Hollen on March 29, 2021
  • The “American Families Plan” announced by President Biden on April 28, 2021

For the 99.5 Percent Act

Senator Sanders has introduced a bill like this one in every Congress for the past 10 years. Although it is unclear whether this legislation will make it all the way through Congress, it could provide a roadmap of possible scenarios that will impact wealthy taxpayers. It appears that the effective date for the Sanders bill would be January 1, 2022. Highlights of the bill related to estate and gift tax include:

  • A reduction of the lifetime exemption for estate tax to $3.5 million (it’s currently $11.7 million).
  • A reduction of the lifetime exemption for gift tax to $1 million — to clarify, this means a taxpayer could make lifetime gifts of $1 million without writing a check to the IRS for gift tax. If a taxpayer makes this $1 million gift, they would have $2.5 million of their lifetime “estate tax exemption” remaining (total $3.5 million).
  • Increase in the current 40% estate and gift tax rate to rates ranging from 45% to 65% depending on the size of the estate. The new proposed gift and estate tax brackets are as follows:
    • 45% for estates worth $3.5 million to $10 million
    • 50% for estates worth $10 million to $50 million
    • 55% for estates worth $50 million to $1 billion
    • 65% for estates of over $1 billion
  • Elimination of valuation discounts on the transfer of nonbusiness assets held by an entity.
  • Changes to the grantor retained annuity trust (GRAT), including:
    • A required minimum term of at least 10 years.
    • No decrease in the annuity during the GRAT term.
    • No GRAT terms longer than the life expectancy of the grantor plus 10 years.
    • At the time of creation, the value of the “gift” to the GRAT must equal at least 25% of the value of the asset contributed to the GRAT (no more zeroed out GRATs).
  • Other grantor type trusts – there are proposed changes to other irrevocable trusts where the grantor (or person other than the grantor) is treated as the deemed “owner” of the trust for income tax purposes (grantor trust). The bill provides that the assets in these types of trusts would be included in the grantor’s (or other deemed owner’s) estate for estate tax purposes.

    Also, if there are distributions out of these trusts to beneficiaries during the lifetime of the deemed owner, such distributions would be subject to gift tax. If the grantor “turns off” the grantor trust status and is no longer treated as the deemed owner for income tax purposes, this action would be treated as a deemed gift to the beneficiaries and subject to the gift tax. Prior taxable gifts to the trust would reduce the amount that would be subject to estate or gift tax. This provision would apply to trusts created on or after the date of enactment and would apply to any contributions (by gift, sale, or exchange) made after the date of enactment to existing trusts.
  • A reduction of the term of a generation-skipping transfer (GST) tax trust to 50 years. All new GST trusts created after the date of enactment would be limited to a 50-year term. All existing GST trusts would remain GST exempt for 50 years but then revert to a non-GST exempt trust after the 50 years have elapsed.
  • The gift tax annual exclusion of $15,000 per donee remains for outright gifts of cash or marketable securities. However, use of the annual exclusion to make gifts of interests in pass-through entities, transfers to trusts, or other transfers that cannot be immediately liquidated by the donee will be limited.

Sensible Taxation and Equity Promotion (STEP) Act of 2021

Senator Van Hollen’s draft bill was introduced on March 29, 2021, and could be retroactive to January 1, 2021.

All transfers of assets by gift or at death would be treated as “sold” at their fair market value at the time of the transfer, thereby taxing appreciation immediately on the date of the gift or at the date of death.

  • There are three exceptions:
    • The first $1 million of unrealized gains on gifted property or at death would be exempt.
    • The deemed sale rules would not apply to tangible personal property (other than collectibles) or property held in connection with a trade or business.
    • Transfers to a U.S. citizen spouse or to charity would be exempt.
  • Assets held by existing non-grantor irrevocable trusts will be treated as sold every 21 years and subject to income tax on unrealized gains.
  • When assets are moved from the grantor’s estate to a trust, but the grantor is deemed to be the owner of the assets in the trust for income tax purposes, it appears that the assets would be treated as “sold” when the gift is made to the grantor trust.
  • Gift to a grantor retained annuity trust (GRAT) – Gifts to GRATs would become very complicated, and the treatment of such gifts is currently unclear.

American Families Plan

In March the president signed into law the American Rescue Plan, to provide immediate relief to American families and communities. The American Families Plan was announced on April 28 to expand benefits of economic growth to families at the expense of the wealthiest American taxpayers.

Although the estate tax was not specifically mentioned, the president would eliminate what he refers to as a “loophole that allows the wealthiest Americans to entirely escape tax on their wealth by passing it down to heirs.” The president’s plan would eliminate the step-up in tax basis for assets owned at death with unrealized appreciation in excess of $1 million. This change could create very large capital gains for families who have inherited assets at a time when capital gain tax rates are at an all-time high. The reform would exclude family-owned businesses and farms if the heirs continue to run the business.

Start Planning Now

It is very unlikely that all the above proposals will make it through to new tax law. What is very clear is that 2021 could be the last opportunity for a very long time to do significant estate planning to minimize overall estate and gift tax. To learn more see our article, “With Biden Announced as President-Elect, Consider These Last-Minute Tax Planning Ideas.”

For questions or assistance, contact our experts.

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