If you have recently considered establishing an irrevocable trust, or making lifetime gifts to your children, or other beneficiaries, now may be a good time to act. In a recent address to Congress, President Biden proposed approximately $4 trillion in domestic infrastructure investment and family initiatives, on top of the $1.9 trillion American Rescue Plan enacted earlier this year. In order to fund these initiatives, it is expected that, in addition to raising corporate tax rates, the Biden administration may seek to increase estate and gift tax rates, and may also restrict or eliminate the use of common tax planning strategies related to gifts and irrevocable trusts.
The new spending proposals and funding mechanisms have yet to be debated in Congress, but bills proposed by Senators Bernie Sanders and Chris Van Hollen may give some indication of the types of tax increases that could be enacted in order to fund the initiatives. On March 25, 2021, Sen. Sanders introduced the For the 99.5% Act, which includes major increases in estate and gift tax rates. Some of the major proposed changes in the Sanders bill include:
a reduction in the Federal Estate & Gift tax exemptions from the current combined limit of $11.7 million per person down to $3.5 million per person for estates, and $1 million for lifetime gifts. This measure would expose significantly more individuals and families to estate and gift taxes, and would dramatically reduce the availability of lifetime gifting strategies;
an increase estate and gift tax rates from the current maximum rate of 40% to 65% on the largest estates, and an increase in the tax rate on smaller taxable estates;
disallowance of valuation discounts for transfers of most non-business assets; taxpayers making such transfers would not be able to discount the value of the assets using lack of marketability or minority ownership discounts. This measure would increase the tax costs of transferring interests in family-owned businesses and real estate;
a requirement that any assets in a defective grantor trust be included in the grantor’s taxable estate. This measure would have a major effect on the taxation of irrevocable life insurance trusts, which are currently a popular estate planning tool, and would result in the imposition of estate taxes on trust assets that are not subject to estate tax under the current regime.
In addition to the Sanders bill, Senator Chris Van Hollen has introduced legislation that would effectively eliminate the favorable stepped-up basis treatment for assets in estates that exceed $1 million. The current rule permits a stepped-up basis for all assets held in an estate, with no upper limit on the basis adjustment. Under The Sensible Taxation and Equity Promotion (‘STEP”) Act, a maximum of $1 million in unrealized capital gains would be excluded from tax. The capital gains on any assets above $1 million would be payable by the estate beneficiaries. Under this legislation, taxpayers can pay the tax in installments over a 15- year period for capital gains that apply to an illiquid asset such as a farm or business.
While these are just proposals, it appears that there is significant legislative momentum in support of increased estate and gift taxes. According to the proposed bills, enforcement of any new tax regulations would not take effect until January 1, 2022, so there is still time to plan. It is also important to remember that you should consult with a professional financial or tax advisor in order determine how any legislative changes may affect you. If you have questions about your current estate plan, or if you would like to schedule a consultation to discuss how these proposed tax changes may affect you, contact the Trusts & Estates group at Prince Lobel to set up an appointment.
For more information please contact the author of this alert, Thomas O’Neill or a member of the Prince Lobel Estate Planning, Probate Disputes, and Fiduciary Services practice group.
THOMAS P. O’NEILL
Thomas P. O’Neill is a member of Prince Lobel’s Estate Planning, Probate Disputes, and Fiduciary Services Practice Group. In this role he focuses on estate planning and the administration of trusts and estates. He regularly advises clients in connection with wealth succession planning, Medicaid/MassHealth planning, and complex tax issues related to trusts and estates. Tom also represents executors/personal representatives, beneficiaries, and creditors of estates in probate court proceedings, and throughout the estate settlement process.
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