United States:
Inheritance tax reform – a not-too-distant horizon?
April 15, 2021
Reinhart Boerner Van Deuren sc
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In recent weeks, much attention has been paid to President Biden’s infrastructure plan and its main sources of funding, including the increase in the corporate tax rate. In the shadow of this legislation, two bills were recently introduced in the Senate that directly target current wealth transfer planning techniques. While neither bill is likely to survive in its current form, a recent decision by the Senate Parliament has made the impending inheritance tax reform more likely. These proposals, their entry into force and the possible timeframe for inheritance tax reform are discussed below.
In order to avoid the danger of a filibuster, 60 senators usually have to vote for the proposed legislation. Given the current composition of the Senate, this means that all 50 Democrats and at least 10 Republican Senators would have to agree to move the legislation forward. There have been some talks about ending the filibuster (either in full or in its current form), but even this scenario seems unlikely as Senators Sinema (D-AZ) and Manchin (D-WV) recently endorsed strong opposition to this strategy . As an alternative to passing the law with 60 votes in the Senate, it is possible that the inheritance tax reform will continue to be passed via the “budget vote”, a special procedure in which bills that affect the state budget can be passed by a simple majority. In the past, a budget vote was only allowed once per fiscal year, and the Democrats chose to use that process to pass President Biden’s $ 1.9 trillion COVID-19 aid package earlier this year. In recent weeks, however, the Senate MP has recommended that the Senate procedures be interpreted in such a way that several voting invoices are possible per fiscal year. This interpretation opens up the possibility that another budget reconciliation bill could be used to pass the president’s infrastructure legislation before October. It is possible that some form of the bills summarized below may be adopted to provide further financial support for the landmark infrastructure plan.
For the 99.5% law
Senator Bernie Sanders (I-VT) introduced the “For the 99.5% Act” on March 25, 2021. If passed in its current form, this law would dramatically change estate planning in several important and historical ways. For example:
- The federal inheritance tax exemption would be reduced from its current $ 11.7 million to $ 3.5 million per person. The federal gift tax exemption would also be reduced from the current $ 11.7 million to just $ 1 million per person, which would limit taxpayers’ ability to use lifelong gifts to eradicate the growth in taxable estate.
- The annual gift tax exclusion would also be reduced from $ 15,000 to $ 10,000 per recipient and capped at $ 20,000 per donor per year. Applicable law does not limit the number of annual gift tax exclusions available to the donor each year.
- The estate tax rate would rise from a flat rate of 40 percent to a progressive tax rate between 45 and 65 percent.
- The use of haircuts would be restricted in a number of ways.
- Short term annuity trusts (GRATs) and skip generation trusts (or “dynasty”) would be eliminated.
- Irrevocable grantor trusts would be included in the grantor’s taxable estate. Under current law, it is possible to create a trust that is taxed to the grantor for income tax purposes but excluded for estate tax purposes.
If passed in their current form, these proposed changes would take effect after the Effective Date. Changes to the exemption amounts and rates would only take effect in the following calendar year. Note that existing irrevocable grantor trusts would be grandfathered, but transfers to such trusts would not receive the same treatment after the law came into effect.
Reasonable Taxes and Equity Promotion Act (STEP)
The 99.5% law was followed by the Reasonable Taxes and Equity Promotion Act (STEP), which was introduced by a number of Democratic co-sponsors on March 29, 2021. Under the STEP Act, gifts and estates given for cherished property would be treated as sales, so the unrealized capital gain at the time of transfer would be taxable for the donor. The bill exempts the first $ 1 million capital gain on death. In addition, capital gains of $ 100,000 during life may be excluded from this treatment, but amounts used during life reduce the exclusion available at death. Transfers of valued assets to spouses and charities would also be excluded from such treatment.
Unlike the For the 99.5% Act, the STEP Act proposes retrospective application for any gift or inheritance to take effect after December 31, 2020.
As noted above, any of these laws are unlikely to be passed in their current form, but the proposed legislation provides valuable insight into the types of changes that may be looming. Given the uncertainty surrounding the form, timing and severity of the inheritance tax reform, it is more important than ever to consider additional planning. With gift and estate tax exemptions at an all-time high, this is a real situation for those with significant wealth to use or lose. Moreover, even if the economy slowly improves, there is still a tremendous opportunity to transfer wealth at low values and low interest rates.
The content of this article is intended to provide general guidance on the subject. A professional should be obtained about your particular circumstances.
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