The Firm

New Estate and Gift Taxes on the Way?

3/30/2021 | Article

Authored by: Deirdre R. Wheatley-Liss, LL.M (Taxation)

In recent years, only the wealthiest families in the United States have paid federal estate tax. Currently, the tax is levied only on the portion of an estate’s value that exceeds $11.7 million ($23.4 million for a married couple).

The "For the 99.5% Act" proposed March 25, 2021 by Senator Bernie Sanders could change this – with significant consequences for estates valued at more than $3.5 million.

The Sensible Taxation and Equity Promotion (STEP) Act announced March 29, 2021 by Senator Chris Von Hollen could treat death as a tax realization event -  capital gains tax would be due on inherited assets with unrealized gains of over $1 million.  

While this is just a kick-off for conversations in Congress it does start the clock on planning before year-end to take advantage of the current law before it changes.

We strongly recommend that you contact your Porzio attorney to review your current estate plan – and strategies to minimize taxes – before any changes to the estate and gift tax are enacted.

Summary of Proposed Changes

The proposed legislation:

  • Exempts the first $3.5 million of an individual’s estate from the estate tax. Under the legislation the federal estate tax would affect estates of more than $3.5 million ($7 million for married couples).
  • Establishes a new estate tax rate structure as follows:

    • 45 percent of the value of an estate between $3.5 million and $10 million 
    • 50 percent of the value of an estate between $10 million and $50 million
    • 55 percent of the value of an estate between $50 million and $1 billion
    • 65 percent of the value of an estate in excess of $1 billion
  • Limits lifetime gifting.  There would be a $1 million cap on lifetime gifts and a limit per donor of annual exemption gifts to trusts to be $30,000.

  • Makes death or a gift a capital gains event.  Capital gains taxes would be due upon death or a gift of assets with appreciation in excess of $1 million.  

  • Includes "Grantor Trusts" in a grantor's taxable estate.  For any trusts where the grantor is the income taxpayer, those trusts would be included in the grantor's taxable estate. 

  • Ends tax breaks for dynasty trusts.  The new legislation would strengthen the “generation-skipping tax,” by terminating "Dynasty Trusts" after 50 years.

  • Makes grantor-retained-annuity trusts (GRATs) less effective.  The legislation proposes to prohibit grantor-retained-annuity trusts (GRATs) for a term under 10 years and mandates a minimum gift of 25%.

  • Eliminates Valuation Discounts.  If a person owns a partial interest in a business no valuation discounts could be used for passive assets or when the family owns the balance of the business.

The good news:

  • These are proposed changes for debate, not law.
  • Changes are proposed to be effective January 1, 2022 and most current planning will be grandfathered.
  • There is an opportunity to act now before any changes are made to maximize the wealth passing to your family and align prior planning with any new laws.

We strongly recommend that you contact your Porzio attorney to review your current estate plan – and strategies to minimize taxes – before any changes to the estate and gift tax are enacted.