Senator Sanders – Gift and Estate Tax Reform Proposals Pack a Punch

Anyone out there thinking about estate tax planning, asset protection, making gifts? And, what about those considering expatriation?  I am fielding many more inquiries about expatriation these days.  Well, if you are considering any of these things, my sage advice would be to hurry up.  Major transfer tax law changes look  to be on the way and will certainly impact your plans.  They pack a hard punch that even Senator Sanders’ thick mittens will not soften!   All the Bitcoin folks and Tesla shareholders will be in for a rough ride.

Let’s start with the basics: The US Estate and Gift Taxes are “transfer taxes” and not “income” taxes. The transfer tax is asserted against the person making the transfer, not against the recipient (donee) of the gift or bequest. So, the giver (donor) of the gift might be subject to Gift Tax and, in the case of Estate Tax, the estate itself must pay the taxes owed, not the heir receiving the bequest.  The Gift and Estate tax rules apply differently to US and non-US persons and there are many nuances. (Even more details here).

Senator Sanders Proposal

On March 25, 2021 Senators Bernie Sanders and Sheldon Whitehouse introduced the “For the 99.5% Act” (the “Act”).  According to Senator Sanders, the title of the bill refers to its attempt to put a progressive transfer tax system in place that will result in a stronger economy for 99.5% of Americans, while affecting only the top 0.5% of Americans. The Act all but decimates wealth transfer planning and hits those seeking to avoid “Exit Tax” by reducing their net worth below USD 2 million.  Why is this so?  In a sentence -The Act decreases the lifetime exemption amounts for Gift and Estate tax purposes, while at the same time proposes major increases to these transfer tax rates.

Below is a bird’s eye view of the how the Act will change the transfer tax landscape. For those of you who do not like to read, but prefer to listen to it in a song, this one’s for you.  Truth lies therein.

Transfer Tax Exemption Amounts

The current Gift and Estate tax lifetime exemption amount for each individual stands today at USD 11.7 million (this is the number as adjusted for inflation to 2021).  Currently, the Gift and Estate tax exemptions are unified. To the extent a taxpayer uses any of the exemption amount during his or her life to offset Gift Tax that would otherwise be owed upon the making of taxable gifts, there is simply less of the exemption available at death to offset the Estate Tax.  This generous exemption amount was doubled by President Trump’s tax reform in 2017 and is scheduled to revert to the previous exemption level (half this amount) on January 1, 2026.

The Act separates the exemptions and slashes the exemption amounts with the strength and swiftness of an executioner’s razor-sharp axe.  It proposes a USD 1 million Gift Tax exemption. Full stop.  It is a flat amount and is NOT going to be adjusted for inflation.  The Act proposes a steep drop to USD 3.5 million Estate Tax exemption, and, as under current rules, this amount will continue to be adjusted for inflation.

These proposed changes would be effective for decedents dying, and gifts made on or after, December 31, 2021. So, it is not too late to do some planning, but hurry. This is a “use-it-or-lose-it” situation. The current USD11,700,000 exemption can be utilized either by making lifetime gifts or by dying.  Transfers must take place before the effective date of the changes set out in the Act.

Transfer Tax Rates

The current Gift and Estate tax rates are progressive and range from 18% to 40%.  Amounts above the current USD11.7 million per person exemption amount can be subject to the 40% tax rate (once you get past the first USD1 million beyond the exemption threshold, everything else is taxed at the highest 40% rate).

The Act increases the rates dramatically.  Gift and Estate tax rates under the Act will still be progressive but can reach a whopping 65%.

  • 39% of the value between $750,000 and $3.5 million
  • 45% of the value between $3.5 million and $10 million
  • 50% of the value between $10 million and $50 million
  • 55% of the value between $50 million and $1 billion
  • 65% of the value in excess of $1 billion

Other Changes

The Act affects the Generation Skipping Transfer tax, and contains other proposed changes that would impact transfers as well as the creation of trusts. I have not delved into them in this post, but will mention the annual exclusion for gifts.

Current Gift Tax rules permit the giver of a gift to use an annual gift tax exclusion of USD15,000 per donee (i.e., gift recipient).  For example, under current rules, a donor can make a gift of USD15,000 per person to say, 12 individuals, in a calendar year. No Gift Tax would result and no filings are needed so long as each recipient did not receive gifts from the donor exceeding the calendar year threshold of USD 15,000 per donee. The annual exclusion amount is subject to a cost-of-living adjustment so the amount can increase from year to year to keep pace with the economy, but only in increments of US$1,000. The annual exclusion has remained steady for a number of years and we have seen an increase only in some years due to this limitation.

The Act imposes a new aggregate “per-donor” limit on certain annual exclusion gifts. This limit is equal to twice the annual exclusion amount in effect for the year. The following transfers are subject to this new “per-donor” limit: (1) transfers in trust; (2) transfers of interests through pass-through entities; (3) transfers of interests subject to a prohibition on sale; and, (4) any other transfers of property that, without regard to withdrawal, put, or other such rights in the donee, cannot be immediately liquidated by the donee. In a nutshell, the Act does away with unlimited annual exclusion gifts in those delineated circumstances, by imposing the aforementioned limitations. Gifts of cash and other assets would not be impacted but would remain under the current annual exclusion (USD15,000 per donee and no cap).

Basis “step-up” is another issue. Under the Act a “step-up” in basis is not available to assets held in a so-called grantor trust unless those assets are includable in the grantor’s estate. Other than this, basis “step-up” at death is not targeted. However that does not mean it’s a sure bet.   Another separate and recently introduced bill (the “Sensible Taxation and Equity Promotion (STEP) Act”) goes even further by effectively eliminating any step-up in basis at death regardless whether the assets were held in a grantor trust.  We know that prior to his election, President Biden had said the step-up should go.

For further information about the “For the 99.5% Act” –
• Read the bill, here.
• Read the bill summary, here.
• Read the JCT score of the bill, here.

Posted May 6, 2021


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