By: Stephanie Salmon, CPA

The proposed “For the 99.5 Percent Act”, introduced by Democratic Senators in March of 2021, is aspiring to greatly increase gift & estate transfer taxes on the wealthy.  If this act becomes law, many estate plans will need to be revised to accommodate the proposed changes.  In short, Washingtonians with estates that exceed the State Estate exemption of $2.2 mil. should consider if making gifts of assets now might provide a better result than delaying transfers until the end of retirement.  Here are the highlights of the proposal:
Estate and GST tax exemptions.  The Act reduces the estate and GST tax exemptions from $11.7 to $3.5 million and would be effective on or after Dec. 31, 2021.

Gift tax exclusion.  The gift tax exclusion would be reduced from $11.7 to $1 million, so it would no longer match the estate and GST tax exemptions.  This proposal would take effect on Jan. 1, 2022.

Tax rates increase!  The Act proposes overall rate increases from the current flat rate of 40% and new graduated tax rates, based on the estate value:

o $3.5 to $10 million would be taxed at a 45% tax rate; 
o over $10 million a 50% tax rate; 
o over $50 million a 55% tax rate; and 
o over $1 billion a 65% tax rate.

Reduced valuation discounts.  The Act would reduce discounts, such as for lack of marketability (family-owned entities).  Also, non-business assets held in an entity would be valued as if they were transferred directly to the donee, without being netted against liabilities of the entity.

Grantor retained annuity trusts (GRATs).  Zeroed-out and short-term GRATs are eliminated.  GRATs would be required to have a term of at least 10 years, and the remainder interest would have to be at least equal to the greater of: (1) 25% of the fair market value of the assets; or (2) $500,000.  These would be applicable as of the date of enactment of the new law.

Grantor trusts and insurance trusts.  The Act would include the assets in a grantor trust established after the date of enactment, reduced by the value of any gifts made to the trust, in the grantor’s taxable estate.  This appears to include all post-gift appreciation and income in the estate.  Any asset transfers made after the date of enactment would be included, even if they are transferred to pre-existing trusts.  This would significantly complicate the valuation of estates by including a portion of insurance proceeds, if premium payments were made after the date of enactment for those policies held in pre-existing irrevocable life insurance trusts.

GST trusts.  GST tax-exempt status would only last for 50 years for trusts (after the date of enactment).  The 50-year period would apply to all existing trusts, or the date of the trust, if after enactment.  At the end of the 50-year period, trusts will have an inclusion ratio of one, meaning that all distributions to beneficiary(ies) two generations or more below the transferor will be subject to GST tax.
Crummey rights and annual exclusions.  The Act keeps the annual exclusion intact for a donor’s transfers to an individual donee, but it would effectively eliminate the effect of Crummey withdrawal rights to use annual exclusions for multiple beneficiaries in trust.  Instead, the Act proposes a simple annual exclusion cap of $30,000, total, for transfers to the trust regardless of beneficiaries’ Crummey withdrawal rights. 

It is not too early to begin creating an estate inventory and start looking at possible responses.  Even if this Act does not pass, numerous other proposals are under consideration.  And even if no new legislation is enacted, estate tax rates currently in place will sunset in 2025 which is approaching quickly.  We are happy to help you gather the necessary information and work with your attorney to update your estate plan.