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Monday, July 26, 2021

What You Need to Know About the Proposed For the 99.5 Percent Act

While you might not necessarily think of estate tax is a hot news topic, it has been recently. This has been, in large part due to the “For the 99.5% Act” that Senator Bernie Sanders proposed on March 25, 2021. The sweeping changes in estate planning law that would be made should this Act go through would be profound. Such measures as reducing federal estate and gift tax exemptions, increasing estate tax rates, and including trusts in the taxable estate that were not included in the past that are proposed in the Act could have significant impacts on a number of people’s estate planning strategies. Even if the Act were to become law in October as part of the Budget Reconciliation process, the changes in the For the 99.5% Act would not take effect until the end of 2021. With these potential changes in estate planning law on the horizon, now is the time to understand the potential implications of the Act and how you should plan accordingly.

What You Need to Know About the Proposed For the 99.5% Act

When people talk of the profound changes proposed by the Act, this is not an overstatement. The proposed reduction to the estate tax exemption is 70% and the proposed reduction in the gift tax exemption is 91%. Right now, the federal estate tax exemption amount sits at $11.7 million after being increased during the Trump Administration. The proposed reduction would lower it to $3.5 million. Couples would still be able to claim double the exemption amount. While the gift tax exemption would not be indexed for inflation, the estate tax exemption would continue to be indexed for inflation.

In addition to dramatic changes to the estate and gift tax exemption amounts, the rate at which estates found in excess of the estate exemption amounts will also be changed in a somewhat drastic way. There would be a sliding scale for the estate tax rate. Currently, the estate tax sits at a flat rate of 40%. Under the For the 99.5% Act, estates valued over $3.5 million, but less than $10 million, would be subject to an estate tax rate of 45%. Those estates valued at over $10 million, but less than $50 million, would be subject to an estate tax rate of 50%. Those estates valued over $50 million, but less than $1 billion, would be subject to an estate tax rate of 55%. Finally, the estate tax rate would hit its peak for those estates valued over $1 billion which would be subject to an estate tax rate of 65%.

The Act also proposes significant changes to the way some trusts are handled for estate tax purposes. Historically, some trusts have been prominent legal tools for those with larger estates to avoid estate taxes in whole or in part. For instance, the grantor trust was a common tool employed for this purpose. Individuals and families have used grantor trusts to transfer substantial amounts of wealth outside a grantor’s taxable estate. While the grantor has been required to account for trust assets for income tax purposes, the assets have fallen outside of the grantor’s taxable estate. With a grantor trust, a grantor could pay income taxes on trust assets during his or her lifetime and save heirs from losing out on money lost to estate taxation. The Act, however, would eliminate the ability to use a grantor trust to protect certain assets from being included in the taxable estate. This is because the Act would provide that grantor trusts would be included in the grantor’s estate for estate tax purposes. Furthermore, distributions form the grantor trust would be considered gifts to the beneficiaries and, thus, be subject to the gift tax.

Estate Planning Attorney

As time moves forward, laws and lives change. Estate plans should be updated accordingly. Contact Monk Law Firm today.


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