U.S. Sen. Bernie Sanders introduced an 18-page bill called the “For the 99.5 Percent Act.” It includes federal estate tax rate increases to 45% for estates over $3.5 million with further increased rates up to 65% for estates over $1 billion. The basic exclusion amount will be a $3.5 million estate tax exemption and a $1 million lifetime exemption for gifts. These proposals, if enacted, would become effective for individuals dying after Dec. 31, 2021. This includes any transfers that apply to descendants who are two or more generations below the transferor, known as generation-skipping transfers (GSTs).
Grantor retained annuity trusts (GRATs) will have required 10-year minimum terms. Also, the term of a GRAT can’t exceed more than 10 years beyond the life expectancy of the grantor. Certain minimum remainder amount thresholds must apply. Therefore, the so-called zeroed-out GRAT (this is a trust in which the grantor’s payments are calculated to compute a zero or near zero remainder value based on the current monthly applied interest rate known as the Internal Revenue Code Section 7520 rate) appears to be specifically addressed to be eliminated. This measure will apply to transfers made after any date of enactment if this provision is passed.
The federal grantor income tax rules have several tax code sections in which the transferor of property who retains certain rights, powers, control, or beneficial enjoyment of those assets will be treated as the “owner” of that trust for income tax purposes. That means all income, gains/losses, deductions, and tax credits will be reportable to the grantor, and all income tax liability is the responsibility of that grantor. Estate and tax planners may intentionally create this situation to save estate and possibly income taxes for the family.
This doesn’t mean, in many situations, that the grantor is the owner for estate tax purposes, however. For example, the grantor may have made a completed gift of certain property and didn’t retain certain benefits or estate tax inclusion powers. This bill attempts to cause estate tax inclusion by virtue of holding certain grantor powers or causing gift tax implications if certain powers are “toggled” off prior to the grantor’s life. If these elements are enacted, the so-called intentionally defective grantor trust may not be a planning option in the future.
Trusts may use the GST tax exemption to provide benefits for many generations for long periods of time depending on state law allowances. This bill limits the GST tax exemption of a qualifying trust to a period not exceeding 50 years. The bill also states, “In the case of any trust created before the date of the enactment of this subsection, such trust shall be deemed to be a qualifying trust for a period of 50 years after the date of the enactment of this subsection.”
Currently, annual exclusion gifts of a present interest are permitted up to $15,000 per donee. A donor may make such gifts to an unlimited number of donees. This bill changes the amount to $10,000 and imposes a new annual limit on the donor not allowing annual exclusion gifts to exceed twice this amount in any one year. This provision would go into effect beginning Jan. 1, 2022, if this bill is enacted in 2021.
Sen. Elizabeth Warren’s Ultra-Millionaire Tax Act, generally, includes an annual 2% tax on wealth over $50 million with a 3% tax on wealth that exceeds $1 billion. Trusts that have “substantially the same beneficiaries” will be treated as a single applicable taxpayer. Interestingly, this bill states, “If a trust transfers property by gift or decantation to another trust in any calendar year after December 31, 2020, the transferor trust and the transferee trust shall be treated as a single applicable taxpayer for such calendar year.”
Several senators, including Sen. Chris Van Hollen, have proposed the Sensible Taxation and Equity Promotion (STEP) Act. It would tax certain amounts of unrealized gains received by heirs when they receive assets at death. It provides for modification or the substantial elimination of the stepped-up basis rules. One million dollars of assets would continue to receive a stepped-up basis plus up to $500,000 for personal residences. The legislation allows taxpayers to pay the tax in installments over a 15-year period for capital gains that apply to any illiquid asset like a farm or business. Estates that incur estate tax will be allowed an offset deduction for income taxes paid.
Quite different from the several bills discussed above is the Death Tax Repeal of 2021 introduced by Sen. John Thune and others. As the name indicates, it’s tax legislation that proposes to eliminate federal estate taxes.
Here are some planning strategies to discuss with your clients.