June 3, 2019
By: Kelly A. Zerillo
We are currently living in a time of historically high estate, gift and GST tax exemptions, but this may change with the election of a Democratic presidential candidate coupled with a Democratic House and Senate after the next election. As the Democratic candidate pool increases, candidates are beginning to set their platforms and an initial popular talking point is increasing taxes on the wealthy.
The current climate in the United States is one of increasing awareness of the inequalities that divide the rich and the poor. Producing new laws for taxing the wealthy will be an ongoing issue throughout the election, so it is essential to re-examine your estate plan to ensure you are maximizing the benefits under current law before any changes take effect.
U.S. Senator Bernie Sanders proposed the 99.8 Percent Act in January 2019. Senator Sanders' proposal would decrease the estate tax exemption to $3.5 million (adjusted for inflation) and would increase the maximum estate and gift tax rate to 77%. He also proposes decreasing the gift tax exemption to $1 million.
Senator Sanders' proposal further eliminates the generation-skipping transfer tax exemption ("GST exemption") for transfers to a trust whose termination date is 50 years or greater from the date of its creation thereby limiting the benefits of dynasty trusts. Additionally, Senator Sanders' proposal would curtail the ability to take certain valuation discounts and to make extensive use of annual exclusion gifts to trusts.
U.S. Senator Elizabeth Warren is in favor of a progressive wealth tax, otherwise known as the "Ultra Millionaire Tax," with a standard rate of 2% on wealth over $50 million and a top rate of 3% on wealth over $1 billion. This tax is levied on wealth, not income, and may, therefore, be more impactful on the ultra-wealthy than income taxes or estate taxes. Senator Warren has also proposed a 10-year minimum term for grantor retained annuity trusts (GRATs) and an estate and gift tax exemption of $3.5 million (adjusted for inflation). In her proposed American Housing and Economic Mobility Act of 2018, the maximum rate of estate tax would be increased from its current rate to 65% on estates in excess of $93 million. In addition, for estates in excess of $1 billion, an additional 10% surtax would apply.
U.S. Senator Cory Booker proposed the American Opportunity Act in October 2018, which, similar to the proposals made by Senator Warren and Senator Sanders, would decrease the estate and gift tax exemption to $3.5 million (adjusted for inflation). Senator Booker's proposal calls for a maximum 65% estate tax rate, a higher capital gains tax rate, and capital gains taxes on appreciated assets held at death, all to pay for his "American Opportunity Account" legislation proposal. Under that bill, every child born in the United States would receive a federal "opportunity account" containing $1,000, which they could not touch until they turn 18, at which point such funds could be accessed by that child for certain allowable uses such as purchasing a home or for educational expenses.
Actions to Take in Anticipation of the 2020 Election:
As demonstrated by the proposals of the three presidential hopefuls above, the election of a Democratic candidate coupled with a Democratic House and Senate will likely subject a greater number of moderately wealthy estates to federal estate tax while tightening up the rules on various types of trusts that allow the wealthy to minimize estate, gift and GST taxes. All candidates have supported bringing the exemption back down to $3.5 million, adjusted for inflation. With the current estate, gift and GST exemption at $11.4 million, now is the time to re-examine your estate plan by considering the following strategies:
Focus on wealth transfer through lifetime gifts. Depending on your comfort level, there are different types of gifting vehicles you can use to strategically give away wealth. Assets that will continue to appreciate over time are likely the best assets to gift to a trust for the benefit of your spouse, children and grandchildren.
Consider using unused GST Exemption. You may have already used all of your estate and gift tax exemption, but you may still have remaining GST exemption. If you are not planning on making additional lifetime gifts, consider utilizing your increased GST exemption by applying it to previously created trusts that are not already completely exempt from GST tax.
Execute your GST Exempt Trust. Candidates like Senator Sanders are looking to effectively end the use of trusts created to pass wealth from generation to generation without incurring transfer taxes, known as dynasty trusts. It is essential to execute these trusts before a change in the law if you are looking to transfer your wealth in trust for the benefit of multiple generations. Similarly, if you think a GRAT would be a good vehicle for your appreciating asset, execute a GRAT before 2020.
Give to charity. If you are worried about the impact of an Ultra-Millionaire Tax, have highly appreciated assets and are charitably inclined, you can gift assets to your favorite charity through any one or more of several vehicles, which could reduce the amount of wealth subject to tax, avoid capital gains tax and provide you with a charitable deduction.
There is no way to know what legislation impacting estate planning lies ahead. But you can utilize the historically high estate, gift and GST exemption available now before it potentially disappears. Please contact your estate planning advisor at Moses & Singer to discuss your particular situation.