This spring, two Senate proposals were introduced that contain significant changes to federal estate, gift, generation-skipping transfer (GST) taxes, and, the concept of “stepped-up basis” for inherited and gifted wealth.

It should be emphasized here that these are just proposals and it is unknown what, if any, of these acts will become law.

The two acts are named For the 99.5% Act and the Sensible Taxation and Equity Promotion (STEP) Act.  We will summarize these two acts separately below.

For the 99.5% Act

This was introduced in March 2021 by several senators but most prominently Bernie Sanders.  Some of the most significant provisions include:

  • Reducing the federal estate tax exemption from $11.7 million to $3.5 million for U.S. citizens and residents, with only $1 million of that exclusion can be used for lifetime gift tax exemption
  • Increasing the federal gift and estate tax rate from the current 40% to a more progressive rate structure ranging from 45% (for values over $3.5 million) up to 65% (for values over $1 billion)
  • Substantial changes to the effectiveness of Grantor Retained Annuity Trusts aka “GRATs” by requiring 10-year minimum periods

It should be noted that even if the federal estate tax emption changes contemplated above do not pass, the exemption will go back to roughly $6.3 million on January 1, 2026, when the 2016 tax reform changes sunset.

The Sensible Taxation and Equity Promotion (STEP) Act – One Page High Level Summary of STEP Act from Senator Chris Van Hollen

The most significant push from this act is to eliminate the step-up basis at death and impose built-in gain of property at death, subject to a $1 million exclusion.  Essentially, this means that any property transferred at death is treated as it being sold at fair market value, which triggers taxable income.  There is a deferral period of 15 years to pay that tax.

In addition, property held in a non-grantor trust will be deemed to be sold every 21 years to trigger gains (and taxes).

 

Let me reiterate…these are just proposals at this point and it is unknown what, if any, of these acts will become law, which makes planning extremely difficult.  Current law does provide numerous planning techniques so talking with your JMF advisor on a regular basis is encouraged. Proactive strategies can be effective and in some cases, could be grandfathered in prior to any new laws or provisions enacted.