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Vice President Kamala Harris announced her endorsement of the estate tax provisions contained in the American Housing and Economic Mobility Act of 2024 (the “Act”).  Many of these provisions are changes that President Biden wanted to make in 2020 but was not successful.  Note that the Harris provisions are independent and will supersede the estate tax provisions scheduled to “sunset” in 2026.  For example, the estate and gift tax exemption are set to be reduced to about $6,000,000 on January 1, 2026.  Under Harris’ proposal, it would be reduced to $3,500,000 upon proposal of the Act.  The key provisions Harris wants to enact are the following:

1. Lower the estate and gift tax exemption to $3,500,000 (the 2009 level).
2. Increase the estate tax rates as follows:

• Taxable estate up to $13,000,000 – 55%
• Taxable estate over $13,000,000 but not over $93,000,000. $7,150,000 + 60% of the excess of such amounts over $13,000,000.
• Over $93,000,000 – $55,150,000 + 65% of the excess of such amount over $93,000,000.
• A 10% surtax on taxable estates in excess of one billion dollars.

Example.  A family has total assets of $15,000,000.  There would be no estate tax under current law.  Under the Harris proposal, the tax would be $4,400,000 (i.e., $15,000,000 – $7,000,000 x 55%).

3. Eliminate a step-up in basis for Grantor Trusts not included in the taxable estate. The IRS’ position has been that assets in a Grantor Trust that are excluded from the estate do not get a step-up in basis.  The Bill codifies that position.  However, it does provide that the provisions would not apply to property transfers before enactment.
4. Lower the annual limitation on exclusion gifts from $18,000 to $10,000 with a total limit of $20,000.
5. Grantor Retained Annuity Trust (“GRAT”) terms would be limited to 10 years or longer, annual payments cannot decrease, and the remainder interest must be equal to or greater than 10% of the fair market value of the property transfer to the GRAT. This will likely be the end of GRATs for estate planning purposes.
6. Grantor Trusts will now be included in the Grantor’s estates. Under the current law, a trust established by the Grantor can be excluded from his estate even though all trust income is taxable to him.  This eliminates the use of Intentionally Defective Grantor Trusts (“IDGT”) where the income tax burden associated with the gifts of assets (such as interest and dividends) could be retained by the Grantor, therefore enabling a payment of the taxes by the Grantor to result in tax-free gifts.  If the Grantor Trust is “turned off” and becomes a non-Grantor Trust after it was established, it would be treated as a gift.  These rules would not apply if a Trust was created before enactment, but no additional gifts could be made from the Trust without including some of the Trust assets in the grantor’s estate.  This eliminates the use of Spousal Lifetime Access Trusts (“SLAT”) and creates major problems with funding life insurance trusts after enactment.
7. Impose the generation-skipping tax on transfers to a family member not born as of the date the trust was formed.
8. A lack of marketability and minority interest discounts for business interests would be eliminated.

Given the fact the Bill becomes effective upon its passage, there should be time to get things done in 2025.  It is not anticipated that the Bill would pass in the first six months of the Harris administration.  However, the provisions of the Bill could legally become effective January 1, 2025.  Note that if the Democrats control Congress, the Bill could pass with a simple majority. Whereas if the Republicans control the Senate, 60 votes would be required for passage.

Utilizing existing planning techniques before the end of the year to avoid a retroactive effective date is the most conservative way to plan around the Harris proposals.  One option is to wait until the election before doing anything.  If Trump is elected, then none of this matters.  However, you will then only have about eight weeks to get things done by year end, and there are probably not enough attorneys, appraisers, and accountants around to get that done for everybody.

Planning techniques will include things such as the following, assuming they do not jeopardize your economic security or ability to maintain your desired lifestyle:

1. Establish a GRAT for assets expected to appreciate;
2. Establish an IDGT and fund it with as much as possible so Grantor pays the tax on the income and removes future appreciation from your estate;
3. Use up the $13,610,000 exemption by making gifts in some fashion, such as to a SLAT or IDGT;
4. Make as many $18,000 annual limitation gifts as possible;
5. Take advantage of discounts by making gifts of business interests;
6. If starting a new business, consider having it owned by the children (but parents would retain voting control);
7. Review existing life insurance trusts, and if possible, fund all future premium payments now.

The above is a very general discussion.  The “devil will be in the details” assuming the Harris proposal becomes law.  Any planning will be taxpayer specific.  There will not be one plan that fits all.