On March 25, 2021, Senator Bernie Sanders introduced the For the 99.5 Percent Act (the “99.5 Percent Act”) which proposes to modify the estate, gift and generation-skipping transfer tax. 

Proposed Estate and Gift Tax Rates and Exemptions

The 99.5 Percent Act would reduce the estate tax exemption, set the gift tax exemption at an amount lower than the estate tax exemption, and increase tax rates on large gifts and estates, effectively returning the gift and estate tax rules to the law in effect in 2009, but with higher rates. While generally increasing the gift and estate tax, the 99.5 Percent Act would provide beneficial valuation rules for farms and land subject to qualified conservation easements. These changes would apply to transfers occurring after December 31, 2021.

Under the 99.5 Percent Act:

• The estate tax exemption amount would be reduced to $3.5 Million per individual ($7 Million for married couples), with no adjustment for changes in the cost of living. Under current law, the estate tax exemption amount is $11.7 Million per individual ($23.4 Million for married couples), adjusted annually for changes in the cost of living. However, the current exemption amount is scheduled to be reduced by 50% after December 31, 2025.
   
• The amount of the exemption available to shelter lifetime transfers from gift tax would be reduced to $1 Million per individual ($2 Million for married couples), with no adjustment for changes in the cost of living. The portion of the $1 Million exemption used during an individual’s lifetime to shelter lifetime gifts from gift tax would reduce the amount of the $3.5 Million exemption available to shelter transfers at the individual’s death from estate tax. Under current law, the gift tax exemption is the same as the estate tax exemption (and will also be reduced by 50% after December 31, 2025), and any amount not used during an individual’s lifetime is available to shelter transfers at death from estate tax.
   
• The estate tax rate would increase using a progressive tax rate based upon the value of the decedent’s estate:
  • There would be no tax on the first $3.5 Million of the estate.
  • There would be a 45% tax on the estate in excess of $3.5 Million up to $10 Million.
  • There would be a 50% tax on the estate in excess of $10 Million up to $50 Million.
  • There would be a 55% tax on the estate in excess of $50 Million up to $1 Billion.
  • There would be a 65% tax on the estate in excess of $1 Billion.

Under current law, there is no tax on the first $11.7 Million of the estate (adjusted annually for changes in the cost of living, but scheduled to be reduced by 50% after December 31, 2025), and there is a 40% tax on the estate in excess of the exemption.

The 99.5 Percent Act Would Change Existing Planning Techniques

The 99.5 Percent Act also contains provisions that would significantly curtail the use of current planning techniques, such as the application of valuation discounts to certain interests, use of a grantor retained annuity trust (a “GRAT”), a grantor trust (in which the grantor is treated as the owner of the trust for income tax purposes) and annual exclusion gifts to trusts. These provisions of the 99.5 Percent Act, summarized below, would take effect after the date of enactment of the law.

• Valuation discounts for transfers of “non-business assets” held in business entities, such as partnerships and limited liability companies, and for transfers of partial interests in entities where the entity is controlled by or majority-owned by members of the same family, would be significantly limited. Under current law, there are no such limitations.
   
• GRATs would be required to have a minimum duration of ten years, and the GRAT would be required to have a minimum taxable “remainder interest” at the time of its creation. Under current law, a GRAT may have duration of as short as two years, and no minimum remainder interest is required, thereby allowing a GRAT to be established with no gift tax cost.
   
• If an irrevocable grantor trust were established, the grantor would effectively be treated as owning the property in the irrevocable grantor trust for estate and gift tax purposes, causing the trust assets to be subject to estate tax at the grantor’s death or resulting in transfers subject to gift tax if distributions are made to other individuals during the grantor’s lifetime. Under current law, it is possible to create an irrevocable grantor trust which is not subject to estate tax on the grantor’s death and the only gift taxable transfer is at the time of transfer to the trust.
   
• Multi-generational “dynasty” or “legacy” trusts, which are often structured to avoid application of generation-skipping transfer tax, an additional tax imposed on the transfer of wealth two or more generations below the original transferor, would be limited to a duration of fifty years. In California, maximum trust duration is currently approximately ninety years, although many states now allow trusts to remain in existence for perpetuity. Existing trusts are not excluded from application of this rule and would lose their tax-favored treatment fifty years after the date of enactment of the legislation.
   
• The use of present interest annual exclusion gifts, which currently permit an individual to gift up to $15,000 in value to as many individuals (or trusts for the benefit of individuals) as the donor wishes annually, would be significantly limited for transfers made to trusts, for transfers of “passthrough” entities and transfers of assets which include restrictions on sale or liquidation.

With a closely divided Senate, it is too early to speculate which portions, if any, of the 99.5 Percent Act might become law. We will continue to update you as the legislation develops.

California Proposals

Earlier in the week, the California legislature introduced an amendment to the California Constitution which would impose a tax “surcharge” on wealth above $50 Million and reintroduced additions to the Revenue & Taxation Code which would impose an annual wealth tax of 1% on net worth in excess of $50 Million and 1.5% on net worth in excess of $1 Billion. Read more about this proposed legislation here.

If you would like to discuss this proposed legislation and any planning in anticipation of this or similar legislation that may seek to change the current estate and gift tax laws, please reach out to a member of our Private Client Services group.