Tax Alert: Federal Estate and Income Tax Planning May Be Getting a Makeover

On March 25, 2021, the Senate Budget Committee held a hearing provocatively entitled, Ending a Rigged Tax Code, to outline estate and income tax proposals that would constitute the most progressive tax plan in generations if enacted: the “For the 99.5% Act” and the “Sensible Taxation and Equity Promotion Act” (STEP). These plans are so expansive in reach that they may adversely affect families of modest means.


What’s in the Proposals?

The “For the 99.5% Act” is an ambitious opening argument in the debate over the estate tax.  It proposes the following:

  • Federal estate and the generation-skipping transfer (GST) tax exemption reduced to $3.5 million (down from $11.7 million)
  • The lifetime gift tax exclusion is reduced to $1 million
  • Gift, estate and GST tax rates will be increased up to 65% (from 40%)
  • Valuation discounts for “non-business” assets will be disallowed
  • Curtailment of sophisticated planning strategies
  • Some portion of the assets funding grantor trusts after the enactment of the Act (likely before January 1, 2022) may be includable in the taxable estate
  • Dynasty trusts are limited to 50 years (applies to trusts established before and after enactment)

The STEP Act goes even further by closing the so-called “stepped-up basis” loophole, which allows the basis of assets of inherited property to equal the value on the date of death.


SAX Thoughts – Planning is more important than ever before

Taxpayers should plan now or risk losing what may be a very short window of opportunity.  Keep the following considerations in mind:

  • Estate tax increases under these proposals are dramatic, even for moderately wealthy clients
  • Transferring assets to secure asset protection and business succession purposes will become more difficult if either of these proposals become law
  • Trusts established before these proposals are incorporated into law will enjoy greater flexibility and tax benefits

The debate over the estate tax has already become aggressively progressive and support is growing among a chorus of politicians and their constituents for whom the cries of wealth inequality have been resonating since before the pandemic crisis started.  There is reason to think that these proposals could form the foundation of major tax legislation intended to pay for pandemic relief as well as the expensive infrastructure plan currently being touted by the Biden Administration.

Ultimately there may be a limited window of time to take advantage of significant planning opportunities available under current law.  We encourage you to talk with a Sax advisor  so that we may help you craft plans that can protect and preserve your wealth and the wealth of your family for future generations.


About the Author

Joy E. Matak

Joy Matak, JD, LLM is a Partner at Sax and Co-Leader of the firm’s Trusts and Estates Practice. She has more than 20 years of diversified experience as a wealth transfer strategist with an extensive background in recommending and implementing advantageous tax strategies for multi-generational wealth families, owners of closely-held businesses, and high-net-worth individuals including complex trust and estate planning.  She can be reached at [email protected].