Change is Coming…Beware and Plan for it!

On March 25, 2021, Senator Bernie Sanders and Whitehouse proposed a bill (the “Sanders Bill”) which would drastically change the estate and gift tax. Of course, the Sanders Bill is only a proposal, but this Sanders Bill should be considered in your 2021 planning.

While not comprehensive, the highlights of the Sanders Bill are as follows:

1. Decrease of the estate tax exemption from $11.7 million to $3.5 million effective 1/1/2022.
2. Decrease of gift tax exemption from $11.7 million to $1 million, effective 1/1/2022.
3. Increase in tax rates from 40% to 45%- 65% depending on the size of the estate.
4. Reducing the annual exclusion gifts from $15,000 per donee to $30,000 per DONOR for certain gifts to irrevocable trusts and certain family entities.
5. Eliminate grantor trust planning (grantor trusts would be includable in the estate of the grantor).
6. Minimum term of 10 years for GRATS.
7. Valuation discounts would be eliminated and includability in the estate would be based on the pro rata portion of assets in the entity.
8. Generation skipping transfer tax exemption or dynasty trusts would be limited to 50 years and those trusts currently in existence would also be limited to 50 years after the passage of the Sanders Bill.

Proposals to eliminate the step-in basis of assets upon death were also proposed in another act, the STEP Act, with exceptions for small estates.

ADVICE:  While the Sanders  Bill is currently not law, you can see the “wind” of change. While no one can predict what will actually pass, you can probably assume some change will happen in 2022.  A positive aspect of this Sanders Bill is that this proposal is effective in 2022 and is not retroactive to 2021.

A confusing aspect in 2021 is the use of the $11.7 million exemption. For example, If you gift $3 million this year and the exemption is reduced to $3.5 million in 2022, then in 2022 you will have only $500,000 remaining in exemption. The ONLY way to guaranty the use of the total $11.7 exemption is to USE it in 2021. If the exemption is lowered to any amount lower that $11.7 in 2022, then you will NOT be able to use the full $11.7 million in 2022 and further (at least until the law is changed again).

If this or similar legislation is enacted effective 1/1/2022, offices will be inundated with planning. Best advice… see your advisor sooner than later.

WORD OF THE WEEK: Step-up in basis is a tax law that permits (with certain exceptions) the beneficiaries of an estate to use the fair market value of an asset they receive from a decedent as their cost basis rather than the original cost of the asset to the decedent.

For example, Sean buys Blackacre for $10,000 in 1985, Sean dies in 2021 when Blackacre is worth $200,000 and devises Blackacre to Susan.  If Sean had sold Blackacre for $200,000 before he died, then there would be a taxable gain of $190,000 ($200,000-$10,000).

When Sean dies, Susan receives Blackacre and her cost basis is $200,000 (the fair market value at Sean’s death). The basis is “stepped up” from $10,000 to $200,000 at Sean’s death. Thus, if Susan sells Blackacre for $210,000 after Sean’s death, then the gain is only $10,000 instead of $200,000 ($210,000 minus Sean’s cost basis of $10,000).

That savings in taxes because of the “step-up” in basis is the benefit that the proposed legislation attempts to end. Apparently the government estimates this tax free step-up in basis at death costs the US approximately 41.9 billion!!!! 

GENEROSITY IS A KEY TO HAPPINESS …REACH OUT AND HELP SOMEONE TODAY! 😎