Senator Bernie Sanders (VT) recently proposed a bill titled “For the 99.5% Act”, titled such since it proposes to only tax the top 0.5% of wealthy individuals. If passed, the bill recommends major changes to the current estate and gift tax, which would have an effective date of January 1, 2022. One of the most impactful changes for many families would be a severe decrease in the current estate and gift tax exemption. Additionally, it would eliminate and severely restrict several estate planning strategies that many have relied upon for years. 

It is not clear at the moment whether the proposed law will even be enacted or what the final language of the bill might be after potential compromises from each side. What we do know is, if passed, this would mean an end to the high estate and gift tax exemption enacted under then President Donald Trump’s tax overhaul. The legislation doubled the then $5 million per individual federal exemption to $10 million from 2017, with the current limits sunsetting December 31, 2025. The legislation also mandated a flat tax rate of 40% federal estate tax rate.  However, according to the Joint Committee on Taxation, the ‘99.5% Act’ would raise $430 billion through 2031.

One of the many changes this bill proposes is the reduction of the current estate and gift tax. Currently the estate gift and tax exemption for 2021 is $11.7 million per individual, up from $11.58 million in 2020, which is indexed for inflation. What this means is an individual can leave up to $11.7 million to heirs and pay no federal estate tax, while a married couple is entitled to leave up to $23.4 million estate tax free. However, the proposed bill would reduce the current estate tax to just $3.5 million per individual, which would be a reduction by 70%. Moreover, the proposed bill would reduce the gift tax to just $1 million per individual, which would be a reduction by 91%. 

Here are some of the main takeaways from the proposed legislation: 

  • Reduction of the estate tax exemption amount to $3.5 million per individual; $7 million for a married couple. The exemption would continue to be indexed for inflation.
  • Reduction of the gift tax exemption to $1 million per individual; therefore, the system would no longer be unified and would be more limited in the amount that can be transferred during one’s lifetime.
  • Change in the estate and gift tax rate from a flat 40% rate to a progressive system as follows:
    • 45% of the value of an estate between $3.5 million and $10 million
    • 50% of the value of an estate between $10 million and $50 million
    • 55% of the value of an estate between $50 million and $1 billion
    • 65% of the value of an estate in excess of $1 billion
  • Elimination of valuation discounts for non-business assets, such as family-owned limited liability companies funded with investment assets.
  • Elimination of what are commonly referred to as “Defective Grantor Trusts” by adding a provision to the Internal Revenue Code stating that a trust funded by a grantor after the date of the legislation is considered owned by the grantor for both income and estate tax purposes.
  • Restrictions on funding of new GRATs (Grantor Retained Annuity Trusts), imposing a minimum term of 10 years and minimum gifts upon funding.
  • Limitations on “dynasty” trusts that are intended to go on for multiple generations by requiring the trust to terminate for estate tax purposes after 50 years.
  • Changing the annual gifting exemption (currently $15,000 per donee per year) to $10,000 per donee and adding an annual cumulative limitation per donor of two times the annual limitation. Limitations are also put in place when making gifts to trusts, family entities, or other entities where the assets cannot be immediately liquidated.
  • Protects farmland and conservation easements. The bill would protect family farmers by allowing them to lower the value of their farmland by up to $3 million for estate tax purposes. The bill would also increase the maximum exclusion for conservation easements to $2 million.

Whether or not the proposed legislation is enacted, we encourage you to review your estate plan to ensure it represents the legacy you wish to carry out. If you would like more information on how to get started building your estate plan or revamping an already existing plan, we can ensure to help you customize a plan that is right for you while also keeping it current with the latest legislation.

1 https://www.sanders.senate.gov/wp-content/uploads/For-the-99.5-Summary.pdf