Business owners and individuals with substantial assets should consider gifting assets before new legislation is enacted that could increase gift, estate, and generation-skipping taxes.
One such bill was introduced on March 25, 2021 by Senator Bernie Sanders. If enacted, the bill would reduce the estate and generation-skipping tax exemptions from the current $11.7 million per person ($23.4 million for a married couple) to $3.5 million per person ($7 million for a married couple).
The gift tax exemption would be reduced from the current $11.7 million per person to $1 million per person ($2 million for a married couple).
The tax rate would also increase from the current top rate of 40% to rates of 45% to 65% depending on the size of the estate.
While the chances of enactment of the bill as drafted are highly unlikely, there is little doubt that a search for revenue is on and the estate tax is in the mix. A Biden infrastructure bill could include measures that President Biden has favored, such as reducing the estate tax exemption to $3.5 million, increasing the estate tax rate to 45%, and eliminating or reducing the availability of the “stepped-up” basis in assets at death.
Other items in the Sanders bill could also raise revenue while affecting a relatively narrow band of taxpayers. These include:
- Removing discounts for lack of marketability and lack of control in the value of certain kinds of family-owned entities.
- Substantially changing the effectiveness of GRATs (grantor retained annuity trusts) by requiring a term of at least ten years and a gift value of at least 25% of the value of the assets put into the GRAT.
- Removing the “grantor trust” technique as a means of having grantors pay the income taxes on trust income without having the assets they transferred to the trust included in their estates.
- Imposing a generation-skipping tax on trusts, such as dynasty trusts, created to last longer than 50 years.
- Limiting “annual exclusion gifts” to two recipients per donor where the gifts are made to a trust or are gifts of certain kinds of interests.
Clients who want to reduce their estate tax exposure should seek advice on their situation as soon as possible.