Senator Sanders introduces ‘99.5% law’ that would raise estate taxes and overhaul estate planning

Senator Bernie Sanders introduced what he calls the “99.5% Law” (the “Law”) to the Senate. For deceased persons and gifts made after December 31, 2020, the law would significantly increase federal estate and gift taxes by reducing the federal estate tax exemption from $11,700,000 to $3,500,000. $ per person and would increase estate rates from a maximum rate of 40%, to 45% on estates between $3.5 million and $10 million, with further rate increases of up to 65% for estates over $1 billion. The retroactive application of a tax increase is a constitutional matter which, on a number of previous occasions involving federal income tax, has been endorsed by federal courts, such that a challenge to this raising the federal estate tax seems likely to fail.

Under the Act, the taxable estate of the creator of a “grantor trust” (a trust on which the creator/settlor of the trust is required to pay tax on the income of the trust so that the trust can grow tax-sheltered), would include the value of the trust at the time of the settlor’s death minus the value of the gift when the trust was created. This in effect means that the capital gain of a grantor trust is added to the taxable estate of the grantor. This amendment applies to constituent trusts created after the effective date of the Act and to post-Act contributions to existing trusts. In addition, with respect to grantor trusts, the law would eliminate the increase in the base of assets repurchased by the grantor under the so-called “swap” provisions of grantor trusts. All of these changes significantly reduce the benefit of grantor trusts, which have become a widely used estate tax reduction vehicle.

Targeting other commonly used estate tax savings trusts, the law would limit the duration of grantor-retained annuity trusts (GRATs) to a minimum of ten years and the duration of tax-exempt trusts to fifty years.

The law would also limit valuation haircuts for donations of interests in private businesses.

On the taxpayer side, the bill would reduce the value of farm properties for federal estate tax purposes by $3 million.

Senator Sanders’ summary of the law reports that if the law were to become law, the IRS would collect an additional $1 trillion in federal estate tax from the billionaires’ estates. This of course assumes that they do not bequeath their property to charity.

Needless to say, this law would dramatically change estate planning not just for the very wealthy individuals that Senator Sanders’ summary focuses on, but for many others who currently don’t have to think about estate taxes. A significant number of clients should reconsider their estate plans.

To become law, the law would have to be passed in the House by a majority vote. Whether a super-majority or a simple Senate majority will be required depends on a variety of factors involving the much-discussed “reconciliation” procedures. And, of course, the law should be signed by President Biden. Given the longstanding interest of some members of the Republican Party in abolishing the estate tax, Sen. Sanders’ bill is likely to face significant challenges. We will continue to follow the law as it moves through Congress and will post blogs on the Montgomery McCracken website.

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