Take-Away: Senator Bernie Sanders (Vermont), along with Senator Whitehouse (Rhode Island) filed a Bill on March 25 that would dramatically overhaul the nation’s tax laws and close what many describe as estate planning ‘loopholes.’

Background: Last year while on the campaign trail, Senator Sanders introduced a Bill called “For the 99 Percent Act.” This year’s version is entitled “For the 99.5 Percent Act.” Many of the Bill’s proposed changes are the same, but a couple are different. More to the point, some provisions have a prospective effective date while others have an effective date that is tied to the enactment of the Act, which means that some of the Bill’s provisions could be effective sometime this year, but would not be retroactive should they actually become law. All of us are expecting some tax law changes in the near future. Whether any go so far as the “For the 99.5 Percent Act” remains to be seen. The key provisions of the Bill that would impact estate planning are summarized below.

Federal Transfer Tax Rates (IRC 2001(c)Transfer Tax Rates (IRC 2001(c)): The following rates would be imposed on transfers (lifetime or at death.) The effective date would be after December 31, 2021.

  • $750,000 to $3,500,000: $248,300 tax plus 39% on amounts over $750,000
  • $3,500,000 to $10,000,000: $1,320,800 plus 45% on amounts over $3,500,000
  • $10,000,000 to $50,000,000: $4,245,800 plus 50% on amounts over $10,000,000
  • $50,000,000 to $1,000,000,000: $24,245,800 plus 55% on amounts over $50,000,000
  • Transfers over $1,000,000,000: $546,745,800 plus 65% on amounts over $1,000,000,000

Basic Exclusion Amount Reduced:  The Basic Exclusion Amount would be reduced from $11,700,000 to  $3,500,000 per person. The effective date would be after December 31, 2021.

Annual Exclusion Gifts (IRC 2503(b): Two changes would apply to the annual exclusion gifting opportunity that would apply to any gifts in any calendar year beginning after the date of enactment of the Act. First, only the first $10,000 of such gifts to an individual will not be included in the total amount of gifts made by the donor in the calendar year to the individual, i.e. a reduction from $15,000 per donee. Second, the total cumulative limit of annual exclusion gifts made by the donor in a calendar year will not exceed “twice the dollar amount in effect for such calendar year,” meaning a donor’s total annual exclusion gifts would be limited to $20,000.

Farm Property Exclusion (IRC 2032(a): The exclusion from the decedent’s estate is increased from $750,000 to $3,000,000. The effective date would be after December 31, 2021.

Conservation Easements (IRC 2031(c)(1): The amount of the available conservation easement deduction is increased from $500,000 to $2,000,000, and the percent of the deduction available increases from 40% to 60%. The effective date would be after December 31, 2021.

Grantor Trust Asset Tax Basis (IRC 1014(g): No basis step-up would be available to property that is held in a grantor trust on the grantor’s death. The effective date of this change would be after the enactment of the Act.

Valuation Discounts for ‘Nonbusiness’ Assets (IRC 2031(d): The value of any nonbusiness assets held by an entity will be determined as if the transfer had been made directly to the transferee “and no valuation discount shall be allowed with respect to such nonbusiness assets.” The value of nonbusiness assets “shall not be taken into account to determine the value of the interest in the entity.” A long and detailed definition of ‘nonbusiness asset’ along with a couple of exclusions is provided in the Bill. This would eliminate the use of FLP and LLC wrappers to hold marketable security portfolios. The effective date of this change would be after the enactment of the Act.

Valuation Discounts in Family Owned Entities: “No discount shall be allowed by reason of the fact that the transferee does not have control of such entity, or by reason of the lack of marketability of the interest, if the transferor, the transferee, and members of the family of the transferor or transferee have either control of the entity or own the majority of the ownership interests (by value) in such entity.” This would dramatically curb the aggressive use of family limited partnerships to shift wealth gift tax-free. The effective date of this proposed change would be after the enactment of the Act.

Grantor Retained Annuity Trusts (IRC 2702): The Bill contains two proposed rule changes that would affect GRATs. First, the right to receive the fixed amount would be for a term no less than ten years, and no more than the life expectancy of the annuitant plus ten years.  This would substantially reduce the leveraging that can be achieved with a short-term GRAT. Second, the remainder value of the GRAT cannot be less than the amount equal to the greater of 25% of the fair market value of the property held in the GRAT or $500,000. This would eliminate zeroed-out GRATs. The effective date of these changes would be after the enactment of the Act.

Grantor Trusts Curbed (a new IRC 2901): Several new rules would be applied to grantor trusts that are created after the enactment of the Act, or to transfers to existing grantor trusts that were created before the Act became law. The changes also create a new classification called a deemed owner. First, the value of the deemed owner’s estate will include all assets attributable to that portion of the grantor trust of which the individual is the deemed owner the time of the deemed owner’s death. Second, if the grantor trust ceases to be a grantor trust, the trust’s assets will be treated as having been gifted by the deemed owner to the trust and its beneficiaries. Third, a lifetime distribution to a beneficiary from the grantor trust will be treated as a gift by the deemed owner for gift tax purposes. If the grantor incurred a gift tax funding the grantor trust, that amount would be treated as a credit in the additional estate or gift tax imposed by these changes. In these situations where a lifetime gift or estate tax liability occurs, the grantor trust would pay the transfer tax liability.

GST Trusts (IRC 2242(h): Two changes would apply after the enactment of the Act. First, a qualifying trust, meaning one that is already GST exempt, would not be treated as exempt for longer than 50 years after the date the trust is created. For existing GST exempt trusts, the 50 year duration of GST exemption would run from the date of the enactment of the Act. There are several other detailed rules that apply to transfers of GST exempt assets from one trust to another, or with regard to the creation of separate shares for trust beneficiaries.

Conclusion: We have learned of these proposed changes for quite some time now. What was interesting to see was when some of these changes, if they were ever adopted, would become law. These days with the concern over the possible retroactivity of tax law changes, which uncertainty may hinder current estate planning and asset transfers, it was some relief to read that the “For the 99.5 Percent Act” does not propose to make any of its changes retroactive. The proposed drop in the applicable exemption amount, along with the drastic curb in the amount and number of annual exclusion gifts, might however prompt some wealthier clients who are currently ‘sitting on the fence’ to finally take action.