Proposed Changes to the Estate and Gift Tax Begin to Emerge
On March 25, 2021, Senator Bernie Sanders introduced the “For the 99.5% Act,” under which he proposes, with the aim of targeting the top 0.5% of wealthy Americans, significant changes to the estate, generation-skipping transfer, and gift tax regimes. Below is a summary of the changes and the date the changes would become effective, if the Act is enacted into law. The changes and their effective dates should be carefully reviewed for purposes of deciding whether any estate planning should be discussed with or implemented by clients in case the changes become effective.
| Section | Effective Date |
|---|---|
| Sec. 1- Short Title | N/A |
| Sec. 2- Modifications to Estate, Gift and Generation-Skipping Transfer Taxes • Increases estate tax rates • Reduces estate tax exclusion amount to $3.5 million • Reduces gift tax exclusion amount to $1 million | Applies to estates of decedents dying, and generation-skipping transfers and gifts made, after December 31, 2021 |
| Sec. 3- Modification of Rules for Value of Certain Farm, Etc., Real Property • Increases the maximum permitted reduction in value for certain farmland and other real property (for purposes of the estate tax) from $750,000 to $3 million and indexes that amount for inflation after 2022. | Applies to estates of decedents dying, and gifts made, after December 31, 2021 |
| Sec. 4- Modification of Estate Tax Rules with Respect to Land Subject to Conservation Easements • Increases the amount that may be excluded from a decedent’s gross estate for land subject to a qualified conservation easement by increasing the exclusion to the lesser of 60% of the value of the land (up from 40%) or $2 million (up from $500,000) | Applies to estates of decedents dying, and gifts made, after December 31, 2021 |
| Sec. 5- Disallowance of Step-Up in Basis for Property held in Certain Grantor Trusts • Disallows a step-up in basis for property held in grantor trust if the property is not includible in the estate of the grantor | Applies to transfers after the date of the enactment of the Act |
| Sec. 6- Valuation Rules for Certain Transfers of Nonbusiness Assets; Limitation on Minority Discounts • Includes valuation rules for certain transfers of nonbusiness assets and limits the valuation discount applicable to transfers of minority interests of business assets for estate and gift tax purposes | Applies to transfers after the date of the enactment of the Act |
| Sec. 7- Required Minimum 10-year Term, etc. for Grantor Retained Annuity Trusts • Requires grantor retained annuity trusts to have a minimum 10-year term, a maximum term of the life expectancy of the annuitant plus 10 years, and a remainder interest whose value is not less than the greater of 25% of the value of the property in the trust or $500,000, nor more than the fair market value of the property in the trust | Applies to transfers after the date of the enactment of the Act |
| Sec. 8- Certain Transfer Tax Rules Applicable to Grantor Trusts • Includes in the gross estate of the grantor assets held in a grantor trust • Imposes a gift tax on distributions from a grantor trust to a beneficiary during the life of the grantor • Imposes a gift tax if the grantor ceases to be treated as the owner of the trust during his/her life | Applies to: (1) trusts created on or after the date of the enactment of the Act; (2) any portion of a trust established before the date of the enactment of the Act which is attributable to a contribution made on or after the date of the enactment of the Act; and (3) any portion of a trust established before the date of the enactment of the Act which is treated as owned by a person other than the grantor, if such person engages in a sale, exchange or comparable transaction with the trust that is disregarded on or after the date of the enactment of the Act |
| Sec. 9- Elimination of Generation-Skipping Transfer Tax Exemption for Certain Trusts • Applies generation-skipping transfer tax to generation-skipping transfers made from a trust whose date of termination is more than 50 years from the date of creation (or, with respect to trusts before the date of the enactment of this section, more than 50 years from the date of enactment) | Applies on the date of the enactment of the Act to trusts created after enactment, and applies to existing trusts extending more than 50 years from the date of enactment |
| Sec. 10- Simplifying Gift Tax Exclusion for Annual Gifts • Current law permits gifts of $10,000 per donor and recipient, (indexed for inflation) called the gift tax “annual exclusion”; however, under the Act, the aggregate amount that a donor may exclude with respect to certain gifts (such as gifts to trusts or gifts of partnership units) may not exceed twice the amount of the annual exclusion for the year | Applies to any calendar year beginning after the date of the enactment of the Act |