Senator Bernie Sanders, Chair of the Senate Finance Committee, and Senator Sheldon Whitehouse, Democratic Senator from Rhode Island, have introduced legislation that affects the federal estate and gift tax.
The short title of the bill is the “For the 99.5 Percent Act.” In 2019, Senator Sanders introduced the “For the 99.8 Percent Act,” S. 309, which was not enacted. While the current bill resembles the prior bill, there are differences. For ease of discussion, the legislation just introduced will be referred to as the “2021 Sanders/Whitehouse bill.” Presumably, the bill will be part of “larger legislation,” for example, the infrastructure legislation that is being considered.
The 2021 Sanders/Whitehouse bill would reduce the federal estate exemption to $3.5 million; the exemption for the federal gift tax would be $1 million. Neither exemption amount would be indexed. The gift and estate tax (and thus the generation-skipping transfer tax) would have one rate the following marginal rates: 45% from $3.5 million to $10 million; 50% from $10 million to $50 million; 55% from $50 million to $1 billion, and 65% for the excess above $1 billion.
The effective date for these changes would be January 1, 2022.
Items in the proposed bill are notable for several reasons. First, in connection with the reduction in exemption, the 2021 Sanders/Whitehouse bill does not include a provision that would prevent the imposition of estate tax on taxable gifts made when the exemption was higher (so-called “clawback”). As the Treasury Department has stated that clawback would not apply if the increase of exemption under the “Tax Cuts and Jobs Act of 2017” sunsets in 2026 (as provided in the TCJA), presumably, this omission would be addressed in the legislative process.
Second, the 2021 Sanders/Whitehouse bill would eliminate valuation discounts with respect to “nonbusiness assets,” that is, assets which are not used in the active conduct of a trade or business. This change would be effective as of the date of enactment.
Third, the bill would reduce the “annual exclusion” against the gift tax (currently, $15,000). The annual exclusion means that certain gifts do not count against the federal gift tax exemption. The bill would limit the annual exclusion to one donee to $10,000 with an aggregate limit to all donees in a year of $20,000.
Fourth, the bill would require a minimum 10-year term for grantor retained annuity trusts and a remainder interest equal to the greater of $500,000 or 25% of the market value of the property transferred to trust. The remainder could not exceed the fair market value of the property transferred to trust (relevant only for the $500,000 prong of the test). This change would be effective as of the date of enactment.
Fifth, there are two provisions with respect to “grantor trusts,” that is, trusts whose items of income, deduction, and credit are reportable by the person(s) setting up the trust or holding certain powers over the trust--and not the trust itself.
Under the first provision of the grantor trust provisions, the gross estate for federal estate tax purposes of a deceased “deemed owner” would include all assets attributable to a trust of which a decedent is deemed to have been the owner under the grantor trust rules. This change would be effective to trusts created on or after the date of enactment as well as contributions to “pre-effective date” trusts.
Under the second provision, there would be no change in basis for assets in a grantor trust (or a portion) unless the grantor trust (or portion thereof) were subject to estate tax. The change in basis generally results in an increase (a “step-up”) that under current law effectively eliminates pre-mortem gain. This change would be effective to contributions to trusts made on or after the date of enactment.
Sixth, the bill would eliminate the exemption from generation-skipping transfer tax (“GST tax”) 50 years from the creation of the trust (the rules for when a trust is “created” is not discussed here). The proposed provision would be the subject of regulations, presumably, specifying effective date rules. The provision itself would be effective as of the date of enactment.
The proposals made by the bill have been contained in other bills in one form or another.
It is difficult to imagine that these proposals would pass other than as a part of a reconciliation bill (which bypasses the current filibuster rules in the Senate). Because reconciliation was used for the 10/1/20 to 9/30/21 fiscal year for the COVID-19 legislation (the “American Rescue Plan Act of 2021”), the earliest that the 2021 Sanders/Whitehouse bill could be enacted is October 1, 2021, which may be unlikely. Given the effective date rules, the window for planning how to avoid the rules, if enacted, is somewhat limited.