Senate Proposals to Change Estate Tax and Stepped-up Basis

There have been recent proposals from various U.S. senators that would completely overhaul the estate tax laws. Below is a brief summary of each bill:

For the 99.5 Percent Act

This bill proposed by Bernie Sanders would decrease the federal estate tax exemption to $3.5 million and there would be a $1 million lifetime gift exemption. The estate tax exclusion and gift tax exclusion are both currently $11.7 million. The bill also includes a federal estate tax bump from 40% to 45% for estates over $3.5 million. In addition, Sanders has proposed a graduated rate up to 65% for estates over $1 billion. The estate tax exclusion and gift tax exclusion are both currently $11.7 million. These proposals would become effective for individuals dying after December 31, 2021.

Further, the bill includes limitations for valuation discounts of minority interest holdings on nonbusiness entities. This amendment would apply as soon as the bill is enacted unlike the proposals mentioned above that would not go into effect until 2022.

Grantor retained annuity trusts (GRATs) would have a 10 year minimum term and the term can’t exceed more than 10 years beyond the grantor’s life expectancy. There would also be minimum remainder thresholds which would eliminate the “zero-out” GRAT strategy.

The bill also changes the annual exclusion of $15,000 per donee to $10,000 and imposes an annual limit on the donor which would not permit the donor to make gifts exceeding twice the annual exclusion amount in any one year. This provision would go into effect on January 1, 2022.

Ultra-Millionaire Tax Act

Elizabeth Warren’s bill includes an annual 2% tax on wealth over $50 million and a 3% tax on wealth in excess of $1 billion. Trusts having “substantially the same beneficiaries” would be treated as a single applicable tax payer.

The bill states that if a trust transfers property by gift or decantation to another trust in any calendar year after December 31, 2020, the transferor trust and the transferee trust shall be treated as a single applicable taxpayer.

Sensible Taxation and Equity Promotion Act (STEP Act)

In addition to Bernie Sanders and Elizabeth Warren, Senators Chris Van Hollen, Cory Booker and Sheldon Whitehouse have announced a proposal to eliminate stepped-up basis at death. The bill would permit beneficiaries to exclude up to $1 million plus an additional $500,000 for personal residences in unrealized capital gains. Taxpayers would be permitted to pay the tax in installments over a 15 year period for gains that apply to illiquid assets such as a farm or business. These changes would be retroactive to January 2021.

Currently, inherited assets have their basis stepped up to the fair market value as of date of death, meaning heirs don’t pay tax on unrealized capital gains upon inheritance.