Estate and Succession Planning
Dean Mead’s Estate and Succession Planning Department is one of the largest and most respected groups of estate planning attorneys in Florida. We are frequently…
Potential Estate Planning Issues Under the Proposed “For the 99.8 Percent Act”
The purpose of this article is to follow up on our previous article, “Estate Planning Issues and Opportunities Under the Tax Cuts and Jobs Act.”
The 2026 sunset of the increased exemption amounts included in the Tax Cuts and Jobs Act is not the only looming threat to the current transfer tax regime. On January 31, 2019, Senator Bernie Sanders introduced the “For the 99.8 Percent Act” (the “99.8% Act”), which, if passed, would have substantial consequences on wealth transfer planning.
This Article will provide a brief overview of some of the proposed changes laid out in the 99.8% Act.
Gift/Estate Tax Exclusion Amounts
The current gift/estate tax exclusion amount is $11,580,000 (i.e., $10,000,000 indexed for cost-of-living adjustment after 2010). After 2025, this exclusion is scheduled to decrease to $5,000,000 (indexed for cost-of-living adjustments after 2010).
The 99.8% Act would separate the currently unified gift/estate tax exclusion into two separate exclusions and decrease the amount of both exclusions. The new estate tax exclusion amount would be $3,500,000 (indexed for cost-of-living adjustments after 2010) and the new gift tax exclusion amount would be $1,000,000 (indexed for cost-of-living adjustments after 2010).
Estate Tax Rates
The current estate tax rate is a flat 40% for taxable estates greater than $1,000,000. The 99.8% Act would implement a progressive rate structure that would gradually increase the tax rate for estates with greater values.
The proposed rate structure is as follows: 45% for taxable estates in excess of $3,500,000 up to $10,000,000; 50% for taxable estates in excess of $10,000,000 up to $50,000,000; 55% for taxable estates in excess of $50,000,000 up to $1,000,000,000; and 77% for taxable estates in excess of $1,000,000,000.
Generation Skipping Transfer Tax Exemption
The current generation skipping transfer (“GST”) tax exclusion is $11,580,000 (i.e., $10,000,000 indexed for cost-of-living adjustments after 2010).
Section 2631(c) of the Internal Revenue Code provides that the GST tax exclusion amount is equal to the basic exclusion amount under section 2010(c), which would be changed to $3,500,000 (indexed) under the proposed legislation. One could assume that the GST tax exclusion also would be $3,500,000 (indexed) under the proposed legislation.
The 99.8% Act would drastically reduce the permissible duration of GST trusts. Currently, an individual can make a gift of up to $11,580,000 (reduced for any prior GST tax exclusion allocations) to an irrevocable trust and allocate all of their GST tax exclusion to that gift. As a result, the irrevocable trust would have an inclusion ratio of zero (i.e., the assets in the trust would be entirely exempt from the GST tax for as long as state law allowed the trust to continue) and the assets would not be subject to any type of transfer tax for multiple generations. Under Florida law, a GST tax exempt trust could continue for 360 years.
The proposed legislation would force trusts to have an inclusion ratio of 1 (i.e., be 100% subject to the GST tax) unless they were certain to terminate within fifty years of their creation. In other words, if it was possible that a trust could last longer than fifty years, then the inclusion ratio would be 1 on the day of its creation. This provision would apply retroactively to existing trusts by forcing their inclusion ratios to reset to 1 on the date fifty years after enactment of the 99.8% Act.
Section 2641(a)(1) of the Internal Revenue Code provides that the GST tax rate is equal to the highest marginal estate tax rate. If this rule continues to apply, then the GST tax rate could be 77% under the 99.8% Act.
Annual Exclusion
The current annual exclusion amount is $15,000 (i.e., $10,000 indexed for cost-of-living adjustments after 2010). The annual exclusion applies to the first $15,000 of gifts from a donor to each donee during a year.
Under the 99.8% Act, the annual exclusion would be $10,000 (indexed) per donee for the year. However, there would be a cumulative limitation of twice the annual exclusion ($30,000 based on the current $15,000 indexed annual exclusion amount) for a transfer in trust, a transfer of an interest in a pass-through entity (e.g., partnership or S corporation), a transfer of an interest subject to a prohibition on sale, and any other transfer of property that cannot be immediately liquidated by the donee.
Grantor Trust Rules
Under the current grantor trust rules, a transfer to an irrevocable grantor trust generally is a completed gift that shifts assets out of the grantor’s estate. Any items of income, deduction and credit of the grantor trust are taxed to the grantor and any distribution out of the trust to beneficiaries would not be subject to gift tax.
The 99.8% Act would cause all of the assets held in a grantor trust to be included in the grantor’s gross estate upon his or her death. Any distribution from the trust to a third party during the grantor’s life would be treated as a gift from the grantor to the beneficiary.
The new grantor trust rules would apply to trusts created on or after the date of enactment as well as to any portion of a trust established before the date of enactment that is attributable to a contribution made on or after such date.
Minimum Term for Grantor Retained Annuity Trust
Grantor Retained Annuity Trusts (GRATs) usually are drafted with two year terms. This reduces the risk of the grantor’s death during the term, which would cause a portion or all of the assets in the GRAT to be included in the grantor’s gross estate.
The proposed legislation would require a ten year minimum term for GRATs, which would eliminate the tax planning strategy of using a series of short term GRATs. Grantors would lose control of their assets for an extended period of time and would be well advised to purchase life insurance to provide liquidity to pay potential estate tax in the event they died during the term.
The 99.8% Act also would require a GRAT to have a remainder interest, valued at the time of the transfer, of not less than the greater of 25% of the fair market value of the transferred property or $500,000 (limited by the fair market value of the transferred property). This would eliminate the use of zeroed out GRATs discussed in our previous article.
Conclusion
The 99.8% Act would drastically change the transfer tax system and would limit estate planning opportunities for high net worth individuals.
The Republican Party’s control of the Senate probably eliminates the possibility of this proposed legislation passing under the current Congress. However, the 2020 elections bring the chance that the composition of Congress could change.
If the Democratic Party were to gain control of Congress and the White House, then those individuals who would be affected by this type of legislation should consider taking advantage of currently available wealth transfer opportunities before they potentially disappear.
It seems that Senator Sander’s proposal is already gaining support as U.S. Representative Jimmy Gomez of California’s 34th District recently proposed legislation identical to that of the 99.8% Act.
The intent of this article is to notify individuals of this proposed legislation. There is no guaranty that the 99.8% Act will be enacted in the future or, if enacted, would maintain its current form.
If you have questions regarding the 99.8% Act or would like to discuss its potential impact on your particular estate plan with your attorney at Dean Mead, please contact our department paralegal, Sarah Lovelace, at SLovelace@www.deanmead.com or 407-841-1200 to schedule a call or meeting with your attorney.
