The past year was a wild one for estate planning, as high-net-worth individuals raced to complete planning before the end of the year, not knowing what the political future held for the estate tax. Now that the Democrats have control over the House, Senate, and White House, 2021 will cause another rush to plan. Those who were worried may be further concerned by a recent tax proposal. On March 25, 2021, Senator Bernie Sanders (Vt.) introduced a new estate tax bill, the “For the 99.5 Percent Act,” the Sensible Tax and Equity Promotion (STEP) Act, and other proposals. Estate planners should caution clients about some of the dramatic potential changes and advise them to evaluate their estate planning immediately.

Thank you for reading this post, don't forget to subscribe!

CPAs can build awareness, help clients evaluate planning options, quantify the amount of wealth to be transferred, and so on. But professional advisors have another vital role; CPAs should temper clients’—and other advisors’—zeal to plan, with the reality check that the political environment is so uncertain that no one can predict which, if any, changes may ultimately be enacted. This risk should influence all planning. Individuals should be guided to plan, perhaps on an urgent basis, in case broad new rules like the Sanders proposal are in fact enacted with provisions effective immediately. That planning should be exercised in a prudent and deliberate manner, however, so that in their desire for tax savings individuals do not transfer excessive assets, thereby undermining their own financial security. Planning should also be tempered with steps acknowledging the possibility that no estate tax increases occur.

Higher Rates

The Sanders proposal would dramatically increase estate tax rates. CPAs should consider that, for very high–net-worth clients, the exemptions are not the main driver—rather, the rate of transfer tax is. Increasing from 40% to as much as 65% will have a profound impact on the overall tax cost (especially when coupled with the other proposed restrictions). On a $100 million estate, an approximately $8 million reduction in exemption is important, but a rate of 25% higher on the remaining estate is far more substantial.

Individuals should be guided to plan, perhaps on an urgent basis, in case broad new rules like the Sanders proposal are in fact enacted with provisions effective immediately.

Exemption

The Sanders proposal calls for a reduction in the exemption from the current $11.7 million to $3.5 million and only $1 million for gift tax purposes. The effective date of this change would be January 1, 2022; thus a fear of retroactive changes to the exemption may be unfounded, but it remains uncertain what will be enacted. The planning imperative of this is obvious: High-net-worth individuals should move wealth into trusts now before the law changes or they lose the exemption with which to do so. Planners should immediately contact all clients (if they have not done so already) and caution them to address planning if it may be beneficial. A $3.5 million exemption would affect a much larger cohort of clients than those who have worried about estate taxes in prior years. The remainder of 2021 could be a tidal wave of estate tax planning for clients seeking to implement planning before this change. Caution, however, is in order; because many of the broad changes in the Sanders proposal are indicated to be effective when the law is enacted, the real deadline may not be December 31, 2021, but rather some unknown earlier date of enactment.

Such a change would put the federal exemption below the New York State exemption and create new and odd planning considerations. If this were enacted, would New York modify its system to match the federal law? What would the language in current client wills result in, given this anomaly?

Discounts

The Sanders proposal provides that the value of any nonbusiness assets held by the entity with respect to such interest shall be determined as if the transferor had shifted such assets directly to the transferee (and no valuation discount were allowed with respect to such nonbusiness assets). Simply put, discounts on marketable securities or other nonbusiness assets would be eliminated. This change would have a major negative impact on the leverage that planning can provide. Individuals seeking to secure valuation discounts must act before such a change in the law, as this change would be effective on the date of enactment. Individuals seeking to take advantage of the current high exemption amount might not be able to wait until year end if they also want valuation discounts on nonbusiness assets used in that planning.

GRATs

The Sanders proposal, as many other prior proposals, would basically eliminate grantor retained annuity trusts (GRAT) by requiring a 10-year minimum and 25% minimum gift. Planners might consider, for those who have used their entire exemption, creating longer-term GRATs, because the common practice of rolling or cascading GRAT payments and expirations into new GRATs would no longer be viable. Such a change would dramatically change the administration and use of GRATs.

Grantor Trusts

Grantor trusts, where the settlor pays income tax on the trust earnings, have been the foundation of many estate plans. The Sanders proposal, however, provides that “the value of the gross estate of the deceased deemed owner of such portion shall include all assets attributable to that portion at the time of the death of such owner.” If the assets of a grantor trust were included in the settlor’s estate, many common planning techniques (e.g., note sales to grantor trusts, common insurance trust planning) would change or simply disappear. This rule would apply to trusts created after the date of enactment or to the portion of a grandfathered trust to which new additions are made. This provides a powerful incentive for clients to immediately create and fund grantor trusts that could be implemented before the new law is passed.

GST Tax

Dynastic planning has been a primary objective of much of estate planning. This would be substantially curtailed if the Sanders bill were enacted. If a trust does not terminate in 50 years, the Generation Skipping Transfer (GST) inclusion ratio will require that distributions to skip persons will be subject to GST tax. For existing trusts, the GST inclusion ratio would become 1 in 50 years after date of enactment. Advisors should consider the impact of this proposal on asset protection planning that is so common. This would dramatically change how trust planning is viewed and administered. CPAs may find that if trusts have to be terminated in 50 years, all trust assets will have to be held in a family limited partnership/limited liability company (FLP/LLC) solution in order to provide some measure of asset protection when distributions are made. Alternatively, it may be possible to distribute trust assets into new non-GST exempt trusts.

Thinking Ahead

The Sanders tax proposal may serve as the template for the anticipated Democratic estate tax change proposals. If so, this would change the face of estate planning and require that most individuals affected act immediately to secure benefits while they can, but even those may be limited.

Martin M. Shenkman, JD, CPA, PFS, AEP is an attorney at Shenkman Law in Fort Lee, N.J.