Overview of 2021 Tax Proposals
This is the second article in a series of articles covering potential changes in the tax laws and their effect on estate planning. There are several tax proposals that are under Congressional consideration, and the Biden administration recently released information concerning his proposal, the “American Families Plan.” Although the most prominent bills before the Senate include proposals to lower the estate tax exemption and raise the estate tax rate effective on January 1, 2022, President Biden’s “American Families Plan” does not currently include those proposals.
As he has done since 2010, Senator Bernie Sanders introduced in March of this year an updated compilation of legislative proposals concerning estate, gift, and GST (generation-skipping transfer) tax, as well as related income tax changes. Sanders’ “For the 99.5 Percent Act” proposes to raise the estate and gift tax rates through a progressive rate schedule ranging from 45% to 65% (his 2019 iteration of his plan entitled “For the 99.8 Percent Act” proposes a top rate of 77% instead of the 65% rate). Sanders also proposes to reduce the federal estate and GST tax exemption amounts from $11.7 million to $3.5 million and to reduce the federal gift tax exemption from $11.7 million to $1 million. In addition, Sanders’ plan targets many common estate planning strategies, including valuation discounts for family-owned business interests, grantor trusts, and grantor retained annuity trusts (GRATs). Sanders also proposes to significantly limit the availability of the current $15,000 per donee federal gift tax annual exclusion. The Sanders proposal is effective for deaths, GST transfers, and gifts made after December 31, 2021.
Also under consideration is President Obama’s final proposed budget, which was published in 2016. The Obama proposal includes the same federal estate, gift, and GST tax exemption proposals as Sanders’ plan, but the Obama proposal calls for a fixed 45% tax rate.
In March of this year, Senator Chris Van Hollen introduced the Sensible Taxation and Equity Promotion (STEP) Act which would fundamentally change the income tax environment related to estate planning. The Van Hollen proposals include elimination of step-up in basis at death, triggering capital gains tax on unrealized appreciation when assets are gifted during life or transferred at death, and taxing unrealized appreciation of trust assets every 21 years. Unlike the Sanders’ tax plan, the Van Hollen plan applies retroactively to January 1, 2021.
President Biden’s American Families Plan focuses primarily on increasing revenues from income tax changes, including increasing the top marginal income tax rate, and for some, the long-term capital gains and qualified dividends rate, to 39.6%, eliminating step-up in basis at death, and taxing unrealized gains on assets transferred by gift or at death.
The next article in this series will demonstrate the effect for some of failing to use the currently high federal gift, estate, and generation-skipping transfer tax exemptions before they are potentially reduced through new legislation.