By Stephen R. McDonnell, Esq. On July 11, 2022, Pennsylvania passed Act 68, which limits…
On March 25, the For the 99.5 Percent Act (the “Act”) was proposed in the Senate, which, if enacted, would result in the most extensive changes to the federal estate and gift tax in decades. These changes would dramatically increase the number of taxpayers subject to the estate tax, and would eliminate many common estate planning techniques. The Act would also substantially impact the administration of various trusts that were created prior to its enactment.
While we cannot be certain the Act will pass, there appears to be significant support from Democratic Senators and Congress Members to include these changes to the Internal Revenue Code.
Many of the major proposed changes discussed below would be prospective, allowing taxpayers a limited period to take advantage of the existing, more taxpayer-friendly laws before the changes occur.
Estate and Gift Tax Exemptions and Rates
One major headline from the Act is the reduction in the estate and gift tax exemptions. Currently, each individual can give away a total of $11.7 Million during life and at death without incurring estate or gift tax. The Act would drastically reduce the estate tax exemption to $3.5 Million per person, while setting the gift tax exemption to $1 Million. The estate and gift tax exemptions would no longer be indexed for inflation.
In addition to the reduction in the estate tax exemption, the Act would increase the estate and gift tax rate from the current 40% for gifts in excess of the exemption to a progressive tax rate based on the value of the estate or gift. The progressive rate would start at 45% on amounts exceeding the applicable exemption, and go up to 65% on amounts exceeding $1 Billion.
These changes would apply to transfers occurring after December 31, 2021. Under the proposed law, taxpayers can still take advantage of the higher exemptions and lower tax rates until that time.
Do you need to take action? Taxpayers with assets in excess of the new, lower proposed exemption of $3.5 Million should speak to their estate planning attorneys immediately to determine what opportunities may exist to reduce future potential taxes.
In 2021, a taxpayer can make annual gifts to anyone in the amount of $15,000 or less, and the gifts are not included as taxable gifts. A taxpayer may make annual gifts to an unlimited number of people. Under the Act, the annual gift amount would be reduced to $10,000. Additional limits apply to annual gifts made to trusts and other entities.
This change would be effective starting in 2022, allowing taxpayers to take advantage of the current annual gift of $15,000 per recipient before that time.
Do you need to take action? Taxpayers who routinely make gifts in excess of the new thresholds will want to speak with their lawyers and other advisors to determine if increased giving is appropriate this year to offset lower gifts in the future.
Similarly, clients who have implemented planning such as irrevocable life insurance trusts, or other trusts that require annual contributions, will need to speak to their advisors immediately to determine how best to address this issue if the annual exclusion amount is capped.
Other Proposed Changes
In addition to the major changes outlined above, the Act would also modify the law to eliminate or render useless many other common estate planning techniques. This includes:
- The elimination of most valuation discounts in determining the fair market value of closely held business interests.
- Eliminating the effectiveness of making gifts or sales to intentionally defective grantor trusts.
- Eliminating the effectiveness of grantor trusts by requiring grantor trusts be included in the grantor’s estate for estate tax purposes.
- Elimination of §2503(c) trusts, which are commonly used to make gifts to minors.
- The substantial reduction in the usefulness of grantor retained annuity trusts (GRATs).
- The elimination of dynasty trusts.
Do you need to take action? Taxpayers who have funded grantor trusts, who make annual gifts to trusts, who send out “Crummey” notices, or who have an interest in a dynasty trust or who create dynasty trusts in their estate planning documents will want to speak with their attorneys to determine the impact of the proposed changes on their estate plan and whether changes to their estate plan are needed.
The Act would dramatically increase the number of taxpayers subject to the federal estate and gift tax by lowering the exemption amounts from $11.7 Million to $3.5 Million and $1 Million, respectively. The normal planning tools used to manage the estate and gift tax burden would be significantly restricted.
Clients with assets close to the new proposed exemption amount, or with irrevocable trusts, should speak to their attorneys immediately, as the Act or aspects of it may be enacted soon. Gawthrop Greenwood and its team of lawyers will continue to review legislation and governmental decisions as they unfold.
P. Kristen Bennett and Stephen J. Olsen are leaders of the Trusts and Estates Department at Gawthrop Greenwood’s offices in Pennsylvania and Delaware, where they practice estate and trust administration, estate planning taxation and business transactions. Contact Stephen at email@example.com or 610-696-8225. Contact Kristen at firstname.lastname@example.org or 302-777-5353.