Since the Democrats took control of the presidency and Congress, questions have abounded regarding potential tax reform. This update summarizes the key changes (among others) of two recently proposed bills that would drastically change federal wealth transfer laws.
“For the 99.5% Act”
Introduced by Senator Bernie Sanders (I-VT) on March 25, 2021, the “For the 99.5% Act” would significantly lower the estate tax exemption from a current $11.7 million to $3.5 million. The exemption amount would still be per person and portable between spouses, so married couples would have a $7 million exemption amount. If this law passes, many more individuals and couples will have taxable estates, which means they may choose to explore more complex estate planning strategies with their attorneys to pass on their wealth as tax efficiently as possible.
In addition to a reduced exemption amount, the estate tax rate would be changed from a flat 40% 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 over $1 billion
The bill, if passed, would also reduce the lifetime gift exemption amount from a current $11.7 million to $1 million, and reduce the per-donee annual gift tax exclusion amount from a current $15,000 to $10,000. If passed, the 99.5% Act would become effective on December 31, 2021.
Senator Chris Van Hollen (D-MD) introduced the Sensible Taxation and Equity Promotion (STEP) Act just four days after the introduction of Sanders’s bill. The STEP Act proposes major changes to the taxation of assets transferred to and held in trust. The bill would apply capital gains tax to assets transferred to irrevocable trusts at the time of the transfer — whether during life by gift, or at death. The STEP Act would also trigger tax on the gain of all assets held in the trust at least every 21 years and on the assets distributed from the trust. If the STEP Act were to pass, it would be effective retroactively to January 1, 2021.
The proposed legislation discussed here may never become law. However, the swift introduction of these bills after a Democratic takeover of the presidency and Congress suggests that reform to current income, gift, and estate tax laws is a priority in Washington. In light of these proposed changes, individuals may consider discussing their current estate plan with their attorney to explore any potential impact of these bills or available opportunities under current law.