- Tax Reform is on the Horizon: Are You Ready? – read now
Tax Reform is on the Horizon: Are You Ready?
by Diane Kotkin
March and April were busy months for tax reform proposals. Senator Bernie Sanders introduced the “For the 99.5% Act” which proposes to: reduce existing federal estate and gift tax exemptions, increase estate tax rates, and impose new rules for certain estate planning vehicles. Also introduced was the Sensible Taxation and Equity Promotion (STEP) Act of 2021 that primarily focuses on eliminating the step-up in basis for inherited assets.
Although we do not know if any of these proposals will actually become law, it’s important to know what these provisions are and how they can affect your estate plan. Even if the following provisions are modified, it will still have a lasting impact on a majority of the public.
Some provisions of concern contained in the “For the 99.5% Act” and the STEP Act (please note that this is not an exhaustive list):
- The federal estate tax exemption would be reduced from $11.7 million to $3.5 million for U.S. citizens and residents;
- The federal gift tax exemption would be reduced from $11.7 million to $1 million for U.S. citizens and residents;
- The federal estate and gift tax rate would increase from the current rate of 40% to a progressive estate tax rate structure which begins at 45% for estates valued at $3.5 million to $10 million and increases all the way up to 65% for estates valued over $1 billion;
- The annual gift tax exclusion would be reduced from $15,000 per donee to $10,000 per donee;
- Each donor would be limited to only $20,000 of annual exclusion gifts per year;
- Include certain trusts, such as Intentional Defective Grantor Trusts and Life Insurance Trusts, as being owned by the grantor and, therefore, part of a grantor’s taxable estate at death. This will essentially eliminate many common estate planning strategies to remove assets from a client’s taxable estate. (NOTE: there is some language about grandfathering in certain trusts that are already established and funded);
- Eliminate carryover basis of gifts and, instead, impose capital gains tax on unrealized gains of all gifted property, subject to a lifetime exclusion of $100,000;
- Eliminate the step-up of basis in assets transferred at death and impose an income tax on all unrealized gains, subject to a $1 million exclusion;
- Allow a 15-year installment plan to pay the capital gains tax applicable to illiquid assets, such as farms or businesses;
- Continue to allow the current exclusions of up to $250,000 for individuals and $500,000 for spouses filing jointly for personal residences and assets held in retirement accounts;
- Gifts and bequests made to charitable organizations would remain exempt from capital gains tax;
- Any income tax paid pursuant to the STEP Act will be deductible for estate tax purposes, partially mitigating the effect of the estate tax; and
- Non-grantor trusts would be required to pay tax on capital gains every 21 years, with trusts created in 2005 or earlier having their first “deemed realization” in 2026.
If the step-up in basis at death is eliminated, not only will it create an additional tax liability at the time of death, it will also require meticulous record keeping as there will be a need to establish a historical tax basis of assets not only for the original owner of the asset but for the assets that have been owned by families over several generations.
Currently, these items are still proposals and not yet law. However, they do reflect the intention of the current Congress to increase revenue by taxing inherited wealth. It is our recommendation that you get ahead of the changes by reviewing your estate plans with your advisors. You can contact me at firstname.lastname@example.org or (240-859-2401) to set up a meeting to explore opportunities to mitigate these issues.
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