In March 2021, Senator Bernie Sanders (VT) sponsored a new bill called the “For the 99.5% Act” proposing new and revised estate, gift, and tax rates aimed at the wealthiest 0.5% of Americans.1 The bill is complex, but we’ve attempted to anticipate your questions and cover the most meaningful points here.
Question 1: Who will be affected? (or “Who are the wealthiest 0.5% of Americans?”)
The Act would primarily affect those with assets in excess of $3.5 million (or $7 million for a married couple). For these individuals, the bill would impact their ability to avoid taxes when shifting wealth from their estates to others or into currently tax-sheltered structures such as trusts. Additional changes included in the bill would impact:
- Grantor Trusts
- Annual Exclusion Gifts
- Valuation Discounts
- Generation-Skipping Trusts
- Grantor Retained Annuity Trusts
- Beneficiary Defective Inheritors Trusts
Question 2: Why are we writing about a bill that may never be enacted?
There are three primary reasons:
- Some provisions of the bill would become effective in 2021.
- The bill contains “grandfather” provisions that mean some actions taken now would be allowed to continue under an exemption (or be “grandfathered”) if implemented before the bill is enacted.
- The political climate currently favors this type of legislation. Many think that the October budget reconciliation process might be the earliest, best chance for this Act to pass.
Question 3: What key changes would result from the bill?
Here is a partial list of changes that would result if the bill is enacted:
- The federal estate tax exemption would fall from $11.7 million to $3.5 million.
- The federal lifetime gift tax exemption would be reduced from $11.7 million to $1 million.
- The federal gift and estate tax rate would change from its current rate of 40% to a scaled structure:
- 45% for estates between $3.5 and $10 million
- 50% for estates between $10 and $50 million
- 55% for estates between $50 million and $1 billion
- 65% for estates in excess of $1 billion
- The creation and operation of dynastic trusts would be constrained. Currently exempt from generation-skipping transfer taxes, such trusts would become subject to taxation every 50 years.
- The practice of discounting valuations of business interests gifted or sold to family members and trusts would be limited or curtailed.
- The annual gifting exemption (currently $15,000 per donee/year) would change to $10,000 per donee and would be subject to an annual cumulative limitation. New limitations would also pertain when making gifts to trusts, family entities, or other entities when the gifted assets cannot be easily liquidated.
- Grantor trusts (such as life insurance trusts) would be included as part of the grantor’s taxable estate at death.
Question 4: What should I think about doing right now?
Consult your financial professional. The proposed legislation currently allows for some “grandfathering” of preexisting grantor trusts, and this may mean there’s a limited opportunity to take advantage of the current $11.7 million exemption before a change is enacted.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
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