Proposed Sanders Tax Bill Would Dramatically Affect Estate Tax Planning

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.

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