Summary of the “For the 99.5 Percent Act”

1. Reduction of Estate Tax Credit

The estate tax credit would be reduced to $3.5 million per person ($7 million for a married couple) from the present level of $11.7 million ($23.4 million for a married couple). In addition, the credit would not be adjusted for inflation.  Note that any remaining credit of a deceased spouse that a surviving spouse already has under the “portability” rules will not be reduced under the Act.

Proposed effective date:  January 1, 2022.

2. Reduction in Amount of Estate Tax Credit That Can be Used for Lifetime Gifts

Under current law, taxpayers can use their entire estate tax credit to shelter to lifetime gifts.  Under the Act, only $1 million ($2 million for a married couple) of the estate tax credit could be used to shelter lifetime gifts.  The proposed gifting limit is not indexed for inflation.  Note that the $1 million limit would be reduced by any prior taxable gifts (i.e., gifts that exceeded the annual gift tax exclusion amount for the year of the gift). Consequently, if the proposed bill became enacted, taxpayers who already have made over $1 million of prior taxable gifts would not be able to make additional gifts in the future other than gifts under the annual gift tax exclusion amount, which is currently $15,000 (but see 4. below for proposed reduction in the annual exclusion amount).

Proposed effective date:  January 1, 2022.

3. Increase in Estate Tax Rate

The current estate tax rate (which also applies to taxable gifts) is a flat 40%. Under the Act, the gift and estate tax rate would be a graduated rate as follows:

• 45% for estates between $3.5 and $10 million.
• 50% for estates between $10 and $50 million.
• 55% for estates between $50 million and $1 billion.
• 65% for estates over $1 billion.

Proposed effective date:  January 1, 2022.

4. New Limits on the Annual Gift Tax Exclusion

Under the Act, the current annual exclusion amount of $15,000 (adjusted for inflation) will not be changed.  However, under the Act, there will be an addition limit of $30,000 per year per donor for gifts made to a trust and for assets that cannot be immediately liquidated by the donee (for example, a gift of an interest in a family entity) whether or not the asset is gifted to a trust.

Proposed effective date:  January 1, 2022.

5. New Limitations on Generation-Skipping Tax Trusts (GST Trusts)

The Act would put new limits on the use of “generation-skipping tax” trusts (i.e., trusts which allow assets to pass for multiple generation free of tax).  Under the Act, GST trusts would only be allowed to last for 50 years.

Proposed effective date:       Effective upon the date of enactment of the proposed bill. Note that GST trusts created before the passage of the Act would be deemed “terminated” 50 years after the passage date of the Act.

6. New Limitations on Valuation Discounts

When valuing assets for gift and estate tax for purposes, the Act would eliminate valuation discounts for entities (e.g., partnerships, LLC’s and corporations) that are controlled by the taxpayer or the taxpayer’s family.  In addition, even for entities that are not controlled by the taxpayer or the taxpayer’s family, no valuation discounts can be applied when valuing an entity’s non-business assets or an entity’s passive assets. Passive assets include real estate in which the entity is not considered to be actively managed (for example, property subject to triple-net leases are not considered actively managed).

Proposed effective date:  Effective upon the date of enactment of the proposed bill.

7. Effective Elimination of the Use of Irrevocable Grantor Trusts

Irrevocable “grantor” trusts are used in a variety of ways for estate planning purposes primarily due to the following two aspects of irrevocable grantor trusts:

• The assets gifted to an irrevocable grantor trust are excluded from a taxpayer’s estate but are considered owed by the taxpayer for income tax purposes. Therefore, grantor trusts allow taxpayers to pay the income tax on trust earnings without the payment of such taxes being considered a gift to the trust’s beneficiaries.
• A Taxpayer can sell assets to a grantor trust without triggering capital gains tax on the sale.

Under the Act, the use of grantor trusts for estate planning purposes would be eliminated because the Act would mandate that assets held in a grantor trust would be included in the grantor’s estate upon death of the grantor as if the grantor himself or herself owned the trust’s assets.  In addition, distributions from the grantor trust to the trust’s beneficiaries would be treated as gifts from the grantor.

Proposed effective date:       The new rules would apply only to (i) grantor trusts created after the date of enactment, or (ii) to assets transferred after the date of enactment to a preexisting grantor trusts.

8. Restrictions on the Use of Grantor Retained Annuity Trusts (GRATs)

GRATs are a commonly used estate planning technique which allows a taxpayer to gift assets to a trust (i.e., GRAT) for the benefit of children at a significantly reduced transfer tax cost while retaining an income stream for a specific period of time. The Act would place two new restrictions on the use of GRATs in the future.

• GRATs would have to have a minimum term of 10 years.
• Regardless of the term of the GRAT, at a minimum, gifts GRATs must be valued for gift tax purposes at the greater of 25% of the value the property contributed to the GRAT or $500,000 (but not to exceed the actual value of the property).

Proposed effective date:       The new provisions apply to GRATs created after the enactment date of the proposed bill.