By Anthony Diosdi
On March 25, 2021, Senator Bernie Sanders of Vermont and Senator Sheldon Whitehouse of Rhode Island introduced a bill entitled “For the 99.5% Act.” If the bill is enacted, it dramatically changes the current estate and gift tax system. Below, are the most significant provisions of the 99.5% Act:
1. There would be a reduction of the estate tax exemption amount to $3.5 million per person and $7 million for a married couple. The exemption would be indexed for inflation. Currently, the estate tax exemption per person is $11.7 million and $23.4 million per married couple.
2. There would be a reduction of the gift tax exemption to $1 million per person. Under current law, an individual is permitted a gift tax exemption of $11.7 million.
3. Currently, the estate and gift tax rate is a flat 40%. The 99.5% Act proposes replacing the 40% flat tax with a progressive system as follows: i) 45% of the value of an estate between $3.5 million and $10 million; ii) 50% of the value of an estate between $10 million and $50; iii) 55% of the value of an estate between $50 million and $1 billion; and iv) 65% of the value of an estate in excess of $1 billion.
4. Elimination of valuation discounts for nonbusiness assets which includes family owned limited liability companies which fund investment assets.
5. Elimination of “Defective Grantor Trusts.”
6. Limitations on the funding of Grantor Retained Annuity Trusts (GRATs) by imposing a minimum term of 10 years and minimum gifts for funding.
7. Enacting an Internal Revenue Code Section which would limit dynasty trusts to a term of only 50 years.
8. Reducing the annual gifting exemption from $15,000 per donee per year to $10,000 per donee.
9. Possible elimination of the step-up basis rules at death.
If the 99.5% bill is enacted, these new legislation would become effective as of January 1, 2022. The fate of the 99.5% bill is uncertain. However, given the current climate in Washington, there is a very strong possibility of Congress enacting one of the most impactful changes to the estate and gift tax system seen in many generations. With that said, many opportunities still exist for families to take advantage of the still-elevated estate and gift tax exemptions and to utilize sophisticated wealth transfer techniques such as GRATs, defective grantor trusts and dynasty trusts before they are impacted by future legislation.
Anthony Diosdi is a partner and attorney at Diosdi Ching & Liu, LLP, located in San Francisco, California. Diosdi Ching & Liu, LLP also has offices in Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises clients in tax matters domestically and internationally throughout the United States, Asia, Europe, Australia, Canada, and South America. The firm of Diosdi Ching & Liu, LLP has assisted clients in sophisticated estate planning including the use of GRATs, Defective Grantor trusts, and dynasty trusts. Anthony Diosdi may be reached at (415) 318-3990 or by email: firstname.lastname@example.org.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.