By Attorney Amanda N. Follett and James A. Spella, Schloemer Law Firm, S.C.
Post-Election Environment and Bernie Sanders’ Proposed Legislation
At this point everyone can agree on only one thing – it is unclear what tax changes may occur, but a prudent planner would assume that change will occur. With Congress effectively controlled by Democrats, tax legislation is likely.
Senator Bernie Sanders has proposed a piece of legislation known as the ‘For the 99.5% Act’, which establishes a new estate tax rate on the top 0.5% of Americans who inherit over $3.5 million in wealth. The proposed gift and estate tax bill would reduce the gifting exemption to only $1,000,000, and the $11,7000,000 estate tax exemption to $3,500,000 in 2022. For a married couple, this would mean a reduction in the estate tax exemption from $23,400,000 to $7,000,000 together as a couple.
Transfers in excess of these exemption amounts would be taxed at the following rates:
- 45% of the value on an estate between $3.5 million and $10 million,
- 50% of the value of an estate between $10 million and $50 million,
- 55% of the value of an estate between $50 million and $1 billion, and
- 65% of the value of an estate in excess of $1 billion.
Additionally, the $15,000 per donee gift tax exemption would be limited to $30,000 per donor with respect to certain transfers. The limitation transfers are as follows: a transfer into a trust, a transfer of an interest in certain family entities, a transfer of an interest in an asset that is subject to prohibition on sale, and a transfer of an asset that cannot be immediately liquidated by the done.
This act also would end tax breaks for dynasty trusts, which would prevent the avoidance of passing on fortunes without paying estate or gift taxes by paying income taxes on earnings in “grantor trusts” and by limiting the annual exclusion from the gift tax. Protections to family farmers will also be provided, allowing them to lower the value of their farmland by up to $3 million. Other estate planning techniques that are used to eliminate or minimize estate taxes (such as “valuation discounts”, grantor trusts, and GRATs) would also be eliminated.
If enacted, these changes would not take effect until January 1, 2022, which gives taxpayers approximately seven months to make gifting decisions.
In addition to this Act, Congress is considering other legislation which could result in even greater changes to estate, gift, and income tax laws.
A group of senators has also introduced the Sensible Tax and Equity Promotion (STEP) Act that would eliminate the step-up in basis that beneficiaries receive when they inherit property. Currently, if someone inherits property, that property’s cost basis is “stepped up” in value to the property’s current value at the time of death. As a result, if the property is sold after the step up, no capital gains are generally due on the sale. If step-up in basis is eliminated, those inheriting property would pay increased taxes through capital gains.
In the face of this uncertainty, clients should be reviewing their planning and examining their options, but be cautious in making any large wealth transfers.
Key considerations for 2021 include:
- Exemption. Current gift and GST election is $11,700,000, with this being doubled for a married couple. This could be drastically reduced next year.
- Access. Clients are hesitant to shift wealth unless they have access to that wealth. A key question is what the client’s required cash flow needs are, and making sure steps do not adversely affect required cash flow. You don’t want “buyer’s remorse”.
- Asset Protection. In our litigious society, this point should always be remembered in planning. The current generous exemption can allow clients to transfer substantial amounts out of their estate to protect from creditors.
- Wealth Tax. It is unclear whether a wealth tax may be proposed or enacted in the future. If a wealth tax would be enacted, it could be applied to assets in trust, or possibly just assets in trust after the effective date.
- Retroactive Tax Law Change. There have been more worries about retroactive tax law changes than ever before. The concern is a harsh increase in the estate tax, that could be made retroactive to January 1, 2021. The later in 2021 it gets, the less likely a retroactive tax change could occur, but it is possible.
- Don’t Delay. If you are considering tax law planning, time may be of the essence. It is better to start the conversation now so that you can think through your decisions, rather than being in a position where you have to make decisions about transferring a large amount of assets in a short time due to tax law changes.
- Be Cautious and Run Forecasts. Work with your financial advisor or accountant to prepare forecasts so you understand what your wealth may look like in the future, and to ensure that after any planning you have sufficient assets to protect your cash flow needs in the future.
Be cautious and make sure you are comfortable with any planning. Once a gift or transfer is made, you don’t want “buyer’s remorse”. Protective planning would likely be irrevocable.
We can offer options, but it is your choice. You are the one who has to live with your choice.
- Every Plan Has Risks. Every plan has risks, and there are no guaranteed results. The more complex the planning, the more uncertainties that arise. Especially when dealing with the IRS, there are no guarantees. Extremely large gifts can result in an audit, which may result in an adverse finding or the need for appeals to defend the planning.
Current planning could be undermined by future legislative changes.
- Life Insurance. Insurance can be an integral part of your planning. For example, life insurance or disability insurance can replace lost wealth in the event of untimely death or disability. For example, if spouses create non-reciprocal Spousal Lifetime Access Trusts (SLATs), life insurance can be purchased by one of the SLATs.
In addition, wealth replacement—or creating tax free funds to pay estate tax—can be accomplished by creating Irrevocable Life Insurance Trusts with policies insuring either or both spouses.
- Annual Exclusion Gifts. Currently, each individual can gift $15,000 per person, per year. This means a married couple can gift $30,000 to a person each year. Even if you don’t proceed with any more advanced planning techniques, take advantage of annual gifting.
- Charitable Intentions. Discuss if you have any charitable intentions as part of your planning, as charitable giving is a straightforward way to reduce the estate tax, and it may open up your planning to other techniques, such as creation of a Charitable Remainder Trust (CRT, CRAT, CRUT, etc.)
If you would like to discuss your planning further, please call our office to schedule an appointment with this article’s authors, Attorney Amanda N. Follett and Attorney James A. Spella, or one of our Estate Planning attorneys at 262-334-3471, or email us at [email protected].
Originally published: May 26, 2021.
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Disclaimer: The information contained in this post is for general informational purposes only and is not legal advice. Due to the rapidly changing nature of law, Schloemer Law Firm makes no warranty or guarantee concerning the accuracy or completeness of this content. You should consult with an attorney to review the current status of the law and how it applies to your unique circumstances before deciding to take—or refrain from taking—any action. If you need legal guidance, please contact us at 262-334-3471 or [email protected].