What Would Joe Do (about Estate Taxes)?

Estate tax “reform” continues to be a prime objective for Democrats.

On the heels of more and more talk in Washington about the inequality of the U.S. tax system, Senator Bernie Sanders has just introduced legislation to impose a progressive tax on America’s wealthiest 5%. According to the Joint Committee on Taxation, the goal of this legislation is to raise $430 billion over the next decade.

For those of you still on the fence about making substantial gifts to your loved ones, thereby reducing the size of your taxable estate, the time is ripe.

This proposed legislation exempts the first $3.5 million of an individual’s estate from the estate tax. For those Americans who inherit more than $3.5 million ($7 million for married couples), a new progressive rate structure for estate taxes is established as follows:

• 45% of the value of an estate between $3.5 million and $10 million
• 50% of the value of an estate between $10 million and $50 million
• 55% of the value of an estate between $50 million and $1 billion
• 65% of the value of an estate over $1 billion.

The legislation also would:

• End the use of long-term irrevocable “dynasty” type generation skipping tax trusts
• Prohibit the creation of short-term grantor retained annuity trusts (GRATs)
• Prevent trust creators from avoiding gift taxes by paying income taxes on earnings generated by assets gifted to “grantor trusts”
• Limit the annual gift tax exclusion on gifts made to trusts.
• Eliminate certain “valuation discounts” used in connections with gifts of closely held business interests.

According to Americansfortaxfairness.org, the total wealth of U.S. billionaires grew from $240 billion in 1990 (adjusted for inflation) to $2.95 trillion in March 2020, a twelve-fold increase in their wealth during that period.

On the campaign trail, President Biden suggested that wealthy Americans were not paying their “fair share” of taxes, leading many to believe that some changes to Americas’ wealth transfer system, while perhaps not as drastic as those proposed by Senator Sanders, will be forthcoming.

Currently, individuals have a unified $11.7 million estate and gift exemption. Transfers exceeding that amount are subject to a top tax rate of 40%.  On the campaign trail, Biden expressed an intention to decrease an individual’s federal estate tax exemption amount either to $5 million per individual (and $10 million for a married couple), perhaps indexed for inflation and perhaps not, or to the pre-Tax Cuts and Jobs Act amount of $3.5 million per individual (and $7 million for a married couple). This decrease in lifetime exemption could be coupled with an increased top tax rate of 45%.

If you have not yet used your full lifetime gift tax exemption, 2021 may be the last chance for the foreseeable future to transfer wealth to your loved ones in such an advantageous fashion.