On March 25, 2021, Senators Sanders, Gillibrand, Reed, Van Hollen, and Whitehouse released a bill to the Senate that, if signed into law, will cause substantial changes to the Internal Revenue Code that pertain, among other things, to estate, gift, and generation-skipping transfer taxes.. A similar bill was read into the House by Representative Gomez. The bill, commonly known as “For the 99.5% Act” (the “Act”), was drafted with an effective date of January 1, 2022, but may be effective earlier if included as part of the Senate’s Budget Reconciliation Process before the end of this year. We understand that the Act has Democratic support.

The Act includes the following provisions related to estate, gift, and generation-skipping transfer taxes:

  1. A reduction in the estate tax exemption amount from $11,700,000 per person ($23,400,000 per married couple) indexed for inflation to $3,500,000 per person ($7,000,000 per married couple) – not indexed for inflation;
  2. A reduction in the gift tax exemption amount from $11,700,000 per person indexed for inflation to $1,000,000 per person – not indexed for inflation;
  3. An increase in the estate tax rate from 40% for amounts above the estate tax exemption amount to a graduated rate scale that begins at 45% for amounts above the estate tax exemption amount up to $10 million with graduated rate increases thereafter as estate size increases, going as high as 65% for anything over $1 billion;
  4. The annual gift tax exclusion for gifts to person is reduced to $10,000 per donee and in addition  a per donor annual gift tax exclusion limit of $20,000 for gifts to irrevocable trusts or gifts of certain types of closely-held business interests;
  5. Limitations on the tax treatment of certain types of trusts that can be disregarded for income tax purposes (“intentionally defective grantor trust”) (Note that most life insurance trusts are intentionally defective grantor trusts;
  6. Limits on the use of valuation discounts when valuing family-owned or closely-held business interests (including complex rules that distinguish between what they view as active business assets entitled to certain discounts verses passive business assets such as real estate, cash, and marketable securities which may not be eligible for discount unless you are considered to be “active” in the business); and
  7. Limits on the use of Grantor Retained Annuity Trusts that terminate less than 10 years from the date of creation or that provide for an interest to the remainder beneficiaries of 25% of the fair market value of the assets transferred to the trust or $500,000 – whichever is greater.
  8. Only trusts with a duration of 50 years or less will qualify for generation skipping transfer tax exemptions. Existing trusts will no longer qualify 50 years from the date of enactment of the legislation.

As mentioned above, if enacted, the Act’s effective date would be January 1, 2022. In addition to the Act, Congress is considering other legislation which, if passed, will result in even greater changes to existing estate, gift, generation-skipping transfer, and income tax laws.

If you have assets that are expected to exceed $3,500,000 per person ($7,000,000 per married couple), if you have a life insurance trust to which you make annual exclusion gifts, if you created an intentionally defective grantor trust, or if you intend to transfer interests in family-owned entities by gift or sale to family members, please contact Attorney Johanna Allex at (608)256.0226 at your earliest convenience to discuss how the Act may apply to your situation and whether steps should be taken before the Act’s effective date to avoid estate, gift, or generation-skipping transfer taxes.

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