Benjamin Franklin famously said, “In this world, nothing can be said to be certain except death and taxes.” The saying is true as far as it goes. But where death and taxes meet, change seems to happen with every administration, and not always for the good of the taxpayer and their family.
In 2021, President Biden took office with the Democrats having a narrow majority in the house and an evenly divided Senate. Since the Democratic Vice President is the tie-breaking vote in the Senate, Democrats have a better chance of passing legislation than they have in a long while—and that includes legislation on estate taxes.
President Biden has signaled some proposed tax changes of his own, but those tax proposals are not the only ones floating around Washington. Senator Bernie Sanders (I-VT), who is also President Biden’s so-called “budget chairman,” has introduced proposed estate tax legislation: the “For the 99.5% Act.” But while the name of the proposed act suggests that it will benefit all but the richest few in this country, many taxpayers may find that the act will eat away at the hard-earned assets they planned to leave to their family.
Let’s talk about what this tax proposal could mean for your estate.
Highlights of the For the 99.5% Act
The proposal is premised on the idea that the top one-tenth of a percent of Americans, wealth-wise, own almost as much wealth as the bottom 90%. Sanders says that over the past four decades, wealth that used to belong to the middle-class in this country has migrated into the pockets of the wealthiest, where it remains. In order to address wealth inequality, Sanders argues, we must introduce a progressive estate tax along the lines of the one President Teddy Roosevelt proposed a century ago.
However, that position ignores the impact of the proposed legislation of people who have worked for decades to build a financial legacy for their loved ones, and who could see the rules changed on them at the last minute. Here are some of the possible changes that could take place if Sanders’ proposed tax changes become law:
- The law would exempt the first $3.5 million dollars of an individual’s gross taxable estate (or $7 million for a married couple) from estate tax. A person’s gross taxable estate includes the value of all assets, including even proceeds payable via life insurance policies. The current lifetime exemption is $11.7 million dollars for an individual, and $23.4 million for a married couple (these amounts are set to reduce by half after 2025). Unlike the current exemption amount, which is adjusted annually for inflation, the proposed lifetime exemption under Sanders would not be adjusted for inflation.
- If an estate contains assets in excess of the exemption amounts, those assets will be taxed at rates ranging from 45% to 60% (the current top estate tax rate is 40%).
- From $3.5 million-$10 million: 45%
- From $10 million-$50-million: 50%
- From $50 million-$1 billion: 55%
- >$1 billion: 65%
- Generation-Skipping Tax exemption rules would be changed, so that assets could no longer be left in a “dynasty trust” that avoids paying estate taxes for over 50 years.
- The rules for Grantor-Retained Annuity Trusts would be changed, preventing grantors from taking assets back from the trust after a specified period and making these estate planning tools less attractive to grantors from a tax standpoint.
- The availability of valuation discounts, which allow an individual to pass more assets to heirs/beneficiaries with less tax or exemption use, would be severely curtailed.
While these changes would certainly result in an increase in taxes paid by the very wealthiest Americans, they could also have an impact on the estate planning for others, such as individuals who have spent decades building up a family business or farm to pass on to the next generation.
Should You Worry About the Sanders Tax Proposal?
The good news for taxpayers is that Senator Bernie Sanders’ proposed estate tax changes are a long way from becoming law. These tax proposals are not likely to enjoy broad bipartisan support, but we will keep our eye on them to see if they inch closer to reality. Even if these specific changes to the tax code do not come to pass, it is wise to anticipate that some other unfavorable estate tax developments could arise.
How Should You Prepare to Best Protect the Assets You Want to Leave for Your Loved Ones?
One possibility you should discuss with your estate planning attorney is the strategic use of that $11.7 million dollar estate and gift tax exemption. The exemption is currently at historic highs, and if you make use of it now, you may be better positioned in the event that future tax legislation reduces the exemption amount. As noted above, the exemption is slated to decrease after 2025 anyway, so it may be wise to make use of the increased exemption amount while it is still available.
You should be aware, however, that in estate planning, an action that might be beneficial in one area could have unintended consequences in another. Therefore, you should consult your estate planning attorney to discuss your concerns before taking steps to avoid potential estate tax liability. With offices in Northville and Brighton, we invite you to contact our office to schedule a consultation.