2021 Proposed Tax Law Changes
By: Timothy J. Leake,
Allen Galluzzo Hevrin Leake, LLC
DISCLAIMER: This post is intended to help keep individuals abreast of current and potential changes that could dramatically impact an existing estate plan. It is only provided as a courtesy and is not intended to establish or re-establish an attorney-client relationship.
Estate, Gift, and Income Tax Changes May be on the Horizon
The need to increase funding for governmental programs (whether emanating from the COVID pandemic, anticipated infrastructure improvements, or a variety of agenda items) point to an enhanced possibility that tax increases and modifications to the estate, generation-skipping transfer (“GST”) tax, and gift tax regimes may become reality at any time. In addition, there are new proposals that would subject common estate planning transactions to income tax for the first time. Unfortunately, none of us have a crystal ball to predict what those changes might actually entail or when they will be enacted and become effective. Generally, a change in tax rates becomes effective in the year of enactment (which means a change in rates enacted in September may nonetheless be effective for gifts made back in January), while other changes historically have been made effective only on a prospective basis. But there have been proposals, and a lot of speculation, about retroactive changes this time around.
One proposal made in January 2021, by Senator Sanders, is commonly referred to as the For The 99.5 Percent Act. Another proposal made on March 29, 2021, by Senators Van Hollen, Booker, Sanders, Whitehouse, and Warren, is entitled the Sensible Taxation and Equity Promotion (“STEP”) Act. President Biden more recently proposed a new budget that included some proposed changes similar to the STEP Act. These proposals, if enacted in any form, could result in significant changes to the income, estate, GST, and gift tax regimes.
The 99.5 Percent Act
In a nutshell, the 99.5 Percent Act, if enacted as proposed, could result in:
- The lifetime estate and generation-skipping transfer tax exemptions being reduced from their current level of $11.7 Million per person to $3.5 Million (note that the exemptions are set to be reduced to $5 Million per person, adjusted for inflation, as of 2026 even under current law);
- The current lifetime gift tax exemption (which is also presently tied to the current lifetime estate and generation-skipping transfer tax exemptions) of $11.7 million would be reduced to $1 Million.
- The federal estate and gift tax rates which are currently capped at 40%, could be increased for some to as high as 65%.
- Your annual gift tax exemption of $15,000 per person to whom a gift is made (“donee”) will be limited on gifts to trusts. Currently, you can make annual gifts of $15,000 per donee to an unlimited number of recipients each year even to beneficiaries of trusts. The 99.5 Percent Act caps the amount at two times the annual exclusion on gifts to trusts. This may be particularly important to you, and the way your plan is currently intended to operate, if you are using your annual exemption to pay life insurance premiums. It may be advisable to make gifts now to fund insurance trusts.
- A limit on the number of years that dynastic trusts can avoid estate and/or generation-skipping transfer taxation may be imposed at 50 years. Specifically, in year 50 the trust no longer would be GST exempt. This could reduce the desirability of dynasty trusts in estate planning.
- Reduce certain discounts when valuing intra-family gifts. This might make it advantageous to complete transfers out of your estate before the law changes.
- GRATs will effectively be eliminated by the imposition of a minimum 10-year term for GRATs created after the effective date and require a gift of 25% of the value of $500,000.
- Irrevocable grantor trusts created after enactment will be fully included in the settlor’s estate. This could end the use of grantor trusts which have been the foundation of planning. For grantor trusts created before enactment, if they are funded after enactment (e.g. by post-Act gifts) they will be partially included in the grantor’s estate. This suggests that grantor trusts be created immediately.
The STEP Act
The STEP Act, if enacted as proposed, could not only eliminate the current step-up in basis at death rules (which are rules that generally modify a decedent’s historic tax basis in an asset to the fair market value based upon the value at death) but also result in the actual imposition of a capital gains tax on unrealized gains on the occasion of the transfer of such assets by gift, at death and potentially every 21 years after death for assets held in trust. Deemed realization could also occur on gifts and other transfers. Finally, trusts will be taxed on all unrealized appreciation every 21 years. A substantial concern with the STEP Act is that it is to be effective retroactively to January 1, 2021. Should this change be included in the final legislation, transfers you make in 2021 to avoid the impact of the potential 99.5 Percent Act, could trigger capital gains tax!
President Biden Budget Proposal
President Biden has included several proposed changes in his budget proposal. First, if your adjusted gross income exceeds $1 million, capital gains will be taxed at ordinary income rates. That could approximately double the tax rate from 20% to almost 40% (more if the 3.8% net investment income tax is included). This change could be made effective the date the proposal was announced, in April 2021. President Biden has also adopted the deemed realization events from the STEP Act. The gain will be triggered on gifts, death, and even on funding pass-through entities like partnerships and LLCs. This could have a dramatic impact on income and estate planning. But these changes, unlike the STEP Act, are effective in 2022.
What to Do
The above-referenced proposed changes could not only significantly impact your estate plan but eliminate estate planning options that you may have available today. Regardless of what components of these various tax proposals are enacted, you should evaluate opportunities currently available to you in light of the potential for changes in the law as well as address any changes in your financial or family situation.
Once legislation is passed it may be too late to implement options that may be currently available.
Please contact us if you would like to engage our services and schedule an estate planning review.