With the election over and the congressional makeup decided, we are all hoping to start gaining some clarity on what to expect on the tax policy landscape. In fact, we are beginning to see some action, as campaign promises become bills. However, there is still a great deal of uncertainty as we wait and watch the legislative process unfold. For those considering wealth transfer, the most comprehensive bill on the legislative agenda right now is the “For the 99.5% Act,” introduced by Senator Bernie Sanders on March 25, 2021 (the “99.5 Act”). Its provisions, and some possible action items, are summarized in the accompanying chart. 

Among the most notable changes are the proposed reduction of the transfer tax exemption levels and an increase in transfer tax rates, which would take effect January 1, 2022, under the 99.5 Act.

• The estate and generation-skipping transfer (GST) tax exemptions would drop from $11.7 million per person in 2021 to $3.5 million per person, and the lifetime gift tax exemption would drop significantly to $1 million per person.
• The transfer tax rates would increase from a 40% maximum rate to graduated bracket breaks of 45%, 50%, 55% and 65%, beginning on estates over $3.5 million. 
• The annual exclusion, the yearly staple of transfer tax planning, would remain at $15,000 per donee per year, but would be capped at $30,000 per donor for certain transfers, most notably those transfers to trusts. 

In addition to these structural changes, there are also proposed changes to a number of strategies often employed by those wanting to efficiently transfer wealth. Under the 99.5 Act, these changes would take effect on the date of enactment (signing) of the bill.

• Grantor retained annuity trusts (GRATs) will be required to last at least 10 years, and must produce a taxable gift on creation of at least 25% of the value of the assets transferred or $500,000, whichever is greater. 
• Irrevocable grantor trusts, which are currently excluded from the grantor’s estate while being taxed to the grantor for income tax purposes, have allowed donors to sell assets to irrevocable trusts without incurring any capital gains tax. The bill would eliminate the estate tax exclusion of such trusts and, consequently, the transfer tax benefit.
• Dynasty trusts, which currently may exist for many generations without being subject to transfer tax, will now lose the protection of any GST tax exemption 50 years from creation of the trust, or 50 years from date of enactment for existing trusts. 
• Certain valuation discounts on transferred assets will generally be eliminated for transfers to family members, based on rules attributing ownership of an asset by family members to the donor. 

It is important to note that these strategies are not being repealed, but their effectiveness will be curtailed. The following chart contains some actions you may wish to consider now.

At this point, it is impossible to know the specific terms of the 99.5 Act, or even if the act will be passed. But clients who have significant lifetime gift tax exemption remaining, and have been considering taking advantage of the current exemptions, may wish to talk with their tax and legal advisors about the impact of these provisions on their planning. 

Finally, these changes may indicate that making large gifts this year is advisable, but it is important to note that a separate bill—the “Sensible Taxation and Equity Promotion (STEP) Act,” introduced by Senator Chris Van Hollen on March 29, 2021—provides that any gifts or inheritances that occur after January 1, 2021, will incur a capital gain on transfer or at death. That is to say, if both of these bills are enacted (again, the likelihood of that is a matter of guesswork at this point), taking advantage of making lifetime gifts before the effective date of the 99.5 Act could result in realizing a capital gain under the STEP Act. Of course, an additional tax liability is not something that anyone wants to be surprised with, but it is worth considering that payment of income tax by the donor will result in the benefit of an increased basis for the asset in the hands of the donee.

These are just a few of the legislative changes that could take place this year. It is important to consult with qualified professionals about the implications of potential legislative changes on transfers you may be contemplating, as well as your overall wealth plan.

Caroline McKay is a senior wealth strategist with CIBC Private Wealth’s Boston office, and has 13 years of industry experience. In this role, she works closely with relationship managers and clients to develop and implement estate and wealth transfer strategies as part of the firm’s integrated wealth management process.