Private Business Counsel

Senator Bernie Sanders has introduced in the Senate what he calls the “99.5% Act” (the “Act”). For individuals dying and gifts made after December 31, 2021, the Act would substantially increase the federal estate tax by reducing the federal estate tax exemption from $11,700,000 to $3,500,000 per person and increase the estate and gift tax rates from a maximum rate of 40%, to 45% on estates between $3.5 million and $10 million with further rate increases topping out at 65% for estates in excess of $1 billion. The gift tax exemption is reduced to $1,000,000 beginning in 2022.

Under the Act the taxable estate of the creator of a “grantor trust” (a trust on which the creator/grantor of the trust is required to pay the trust’s income tax liability so the trust can grow income tax-free), would include the value of the trust at the time of the grantor’s death minus the value of the gift when the trust is created. This means in effect that the appreciation on a grantor trust is added to the grantor’s taxable estate. This change applies to grantor trusts created after the date of enactment of the Act and to post-Act contributions to existing trusts. Also, with regard to grantor trusts, the Act would eliminate the step-up in basis for assets re-acquired by the grantor under the so-called “swap” provisions of grantor trusts. All of these changes substantially reduce the benefit of grantor trusts, which have become a widely-used estate tax reduction vehicle.

Taking aim at other commonly-used estate tax savings trusts, the Act would limit the duration of grantor retained annuity trusts (GRATs) to a minimum of ten years and the duration of generation skipping tax exempt trusts to fifty years.

The Act would also limit valuation discounts for gifts of interests in closely-held businesses.

On the taxpayer friendly-side, the bill would allow a $3 million reduction in the value of farm property for federal estate tax purposes.

Senator Sanders’ summary of the Act reports that if the Act were to become law the IRS would collect $1 trillion more in federal estate tax from the estates of billionaires. This of course assumes they do not leave their estates to charity.

Needless to say, that Act would dramatically change estate planning not only for the super-high-net worth individuals Senator Sanders’ summary focusses on, but many other individuals who currently do not have to think about the estate tax. A substantial number of clients would have to reconsider their estate plans.

To become law the Act would need to pass the House by a majority vote. Whether a super-majority or simple majority of the Senate will be required depends on a variety of factors involving the much-discussed “reconciliation” procedures. And, of course, the Act would need to be signed by President Biden. Given the long-time interest among some members of the Republican Party in abolishing the estate tax, Senator Sanders’ bill will likely face some significant challenges. We will continue to follow the Act as it makes its way through Congress and post blogs on the Montgomery McCracken website.

Please contact a member of the Montgomery McCracken’s Trusts and Estates Practice Group if you would like to know how the Act might affect you.