Estate Tax Reform: 99.5 Percent Act

The 99.5 Percent Act is an estate tax reform bill proposed by Bernie Sanders on March 25^th. This is only an initial proposal, but it coincides with the Biden administration’s plan for other income tax reforms. While this will only affect clients of a certain net worth initially, it could still significantly impact other clients’ future legacy and estate planning.

What is an Estate Tax?

Estate taxes have been referred to in the past as the “Death Tax” because assets above a certain threshold are taxed before non-spousal beneficiaries receive the inherited assets. Currently, an estate is taxed 40% if it exceeds the $11.7 million per spouse or $23.4 million as a couple limit.

The threshold for exemptions has increased quite a bit since it was first enacted in 1976:

• 1980: $161,563
• 1990: $600,000
• 2000: $675,000
• 2002-2001: $1,000,000
• 2011: $5,000,000

As discussed in a previous blog, the estate tax exemption limit in 2018, under President Trump’s administration, increased to $11.18 million, but it was set to sunset back to $5 million by 2026. Since the move to $11.18 million in 2018, it has increased the past few years to track with inflation, and it is currently $11.7 million.

The name of the proposed bill, the 99.5 Percent Act, is misleading because it sounds like it would affect not even all of the 1 percent, just half of the top one percent of the population. However, this is not necessarily the case. While some of the legislation will indeed only affect those with an ultra-high net worth, some of the proposed laws could still affect millions of Americans who have built wealth over their lifetime.

99.5 Percent Act’s Biggest Provisional Changes:

• Reducing estate tax exemption from $11.7 million to $3.5 million per person.
• Reducing the lifetime gift exemption significantly from $11.7 million to just $1 million.
• Increasing the progressive federal gift and estate tax rate to 45% for values over $3.5 million, 50% for the excess value over $10 million, 55% for the excess value over $50 million, and even 65% for the excess value over $1 billion.
• Disallowance of a step-up based on assets held in a grantor trust.
• Grantor Retained Annuity Trusts (GRATs) will be required to have a minimum 10-year term and a 25% minimum value for the remainder interest.
• Elimination and/or reducing the discounts for family limited partnerships.
• Limiting annual gift amounts to $30,000 per donor, as opposed to current $15,000 per recipient annually.
• Taxing long term trusts after a given period (the current discussion is in excess of 50 years).

Will these changes impact me?

While nothing has been passed yet, and there will most likely be some pushback, it is expected that some form of estate tax legislation will be passed and enacted by January 1, 2022. And we think that the current number, $11.7 million, is the highest we will see the estate tax exemption threshold climb for the foreseeable future. If you have an estate over $3.5 million, now would be a good time to discuss estate planning with attorneys, CPAs and financial advisors. There could be some strategies to implement before year end, such as setting up gifts and trusts, that would help reduce the amount of your estate the government is able to take after your passing.

Matthews Barnett, CFP®, ChFC®, CLU®
Financial Planning Specialist