March ended with two pieces of progressive legislation introduced in the Senate: the For the 99.5% Act, which proposes significant changes to federal estate, gift, and generation-skipping transfer (GST) taxes, and the Sensible Taxation and Equity Promotion (STEP) Act, which addresses the concept of "stepped-up basis" for inherited and gifted wealth. These acts, if enacted, would dramatically alter the transfer tax regimes. It is still unknown which, if any, provisions in these acts will become law. However, it is important to be aware that these acts contain the following proposals, which would significantly alter the estate planning landscape:
- Reduce the federal estate tax exemption from $11.7 million to $3.5 million for U.S. citizens and residents.
- Reduce the federal lifetime gift tax exemption from $11.7 million to $1 million for U.S. citizens and residents.
- Increase the federal gift and estate tax rate from the current 40% to a more progressive rate structure ranging from 45% (for values over $3.5 million) up to 65% (for values over $1 billion).
- Reduce the annual exclusion gift from $15,000 per donee to $10,000 per donee, and impose a total annual limit of $20,000 of annual exclusion gifts per donor.
- Limit generation-skipping trusts to a 50-year period, and impose GST tax on current GST trusts every 50 years.
- Dramatically reduce, if not wholly eliminate, discounted valuations of closely held business interests gifted or sold to family members and/or irrevocable trusts.
- Include Grantor Trusts (IDGTs, such as Life Insurance Trusts) as part the grantor's taxable estate at death, thereby eliminating many common estate planning strategies to remove assets from the donor's taxable estate. (Note: The proposed legislation currently allows for some "grandfathering" of preexisting, fully funded IDGTs.)
- Disallow a step-up in basis for assets held in IDGTs that are not includable in the grantor's estate at death.
- Reduce the effectiveness of Grantor Retained Annuity Trusts (GRATs) by requiring a 10-year minimum period and prohibiting the use of "zeroed-out GRATs." (Note: The proposed legislation currently allows for "grandfathering" of preexisting, fully funded GRATs.)
- Tax unrealized capital gain in non-grantor trusts every 21 years, beginning in 2026.
- Increase the capital gains tax rate from 20% to 39%.
- Eliminate the carryover basis of gifts and impose capital gains tax on built-in gain of all gifted property, subject to a $100,000 lifetime exclusion.
- Eliminate the step-up basis at death and impose income tax on all built-in gain of property transferred at death, subject to a $1 million exclusion.
This is not an exhaustive list. We aim to highlight key components of the acts that would most impact our clients. While these proposals are not yet law, it is clear that the president, along with the Democrat-controlled Congress have a targeted interest in raising revenue by reforming the taxation of inherited wealth. We recommend that clients act expeditiously to review their current estate plans with their tax and wealth advisors, to determine whether there are planning opportunities for their families before any changes to the existing laws are implemented.