Take-Away: We have previously reviewed Bernie Sanders’ proposed “For the 99.8%” Bill that was filed last spring in the Senate. We now have an identical Bill filed in the House of Representatives by Congressman Jimmy Gomez, of California. If adopted in some form, these Bills would create major changes in conventional estate planning.


Progressive Rates: Under these separate Bills, the flat 40% federal estate tax and generation skipping transfer tax rates would become progressive. The current 40% estate and GST rates would increase to 45%. The transfer tax would be imposed on estates larger than $3.5 million (down from the current $11.4 million exempt amount per individual.) The transfer tax rates above $10 million would progressively increase. For estates between $50 million and $1.0 billion, the transfer tax rate would be 55. For estates larger than $1.0 billion, the transfer tax rate would be 77%.

Tax Exemptions: The gift tax exemption would be ‘disconnected’ from the estate and GST exemption amounts. The federal estate and GST exemptions would be lowered from $11.4 million each, to $3.5 million each. The federal gift tax exemption amount would drop from $11.4 million to $1.0 million per person.

Annual Exclusion Gifts: Currently a donor has the ability to make lifetime annual exclusion gifts (of present interests in property) of $15,000 per donee, to an unlimited number of donees in a single year. Example: A donor gifts $15,000 to 100 donees and thus removes $1.5 million from the donor’s taxable estate, all in a single year. Under the Bills, the donor would be limited to 6 or 7 annual exclusion gifts per year. This change could affect the use of Crummey irrevocable life insurance trusts (ILITs) that are used to pay annual insurance premiums.

Curtailed Strategies: Existing estate planning strategies currently used to shift wealth without any tax would be dramatically altered if either of these Bills become law. Some of the more noteworthy proposed changes would include:

  • GRATs: Grantor retained annuity trusts (GRATs) would have a minimum duration of 10 years, and the value of the remainder interest in the GRAT would initially have to be at least 10% of the value of the assets transferred to the GRAT. This means a taxable gift would be made when the GRAT was first funded, and the extended duration of the GRAT will decrease the likelihood that the GRAT’s hurdle rate of interest used when the GRAT was created will be overcome to shift wealth gift-tax-free to the remainder beneficiaries.
  • IDGTs: Intentionally defective grantor trusts (IDGT), where the grantor-settlor continues to pay the income tax liability of the trust, yet the trust’s assets are removed from the grantor’s taxable estate would be changed so that the value of the grantor trust assets would be taxed in the grantor’s taxable estate. Sales of appreciating assets to ‘defective grantor trust’ on a capital gains tax-free basis could ultimately disappear.
  • Dynasty Trusts: Long duration trusts that used to avoid federal estate taxes and GST taxes on the deaths of the trust beneficiaries over multiple generations would be curtailed. Under the Bills, the duration of a trust used to avoid federal estate and generation skipping transfer (GST) taxes would be limited to 50 years, after which the value of the trust’s assets would be included in the trust beneficiary’s taxable estate.

Conclusion: These are only proposed Bills. Anyone can debate if these Bills ever become the law, or any version of them become the law in the future. However, even with that practical observation, individuals need to be aware of these possible changes to the tax laws and their possible impact on existing estate planning techniques. In particular, wealthy individuals who might have taxable estates (those larger than $3.5 million, or if married $7.0 million) should seriously consider some tax planning opportunities while those opportunities still exist, e.g. lifetime gifts to trusts for children and grandchildren while the GST exemption is at the $11.4 million level; spousal lifetime access trusts, where spouse’s combined gift tax exemption amounts can be used to create lifetime trust for each other, where the value of the trust assets will be removed from their taxable estates, yet they will continue to have access to the income those transferred assets generate.