“For the 99.5% Act": A Look at Proposed Changes and Estate Planning

Joint trusts are typically used for married couples who file joint income tax returns

On March 21, 2021, Rep. Jimmy Gomez and Sen. Bernie Sanders introduced a new bill into Congress called, "For the 99.5% Act." The bill's introduced form is only 18 pages long, but its potential impact on federal estate and gift tax laws significantly affects estate planning. While it is impossible to determine if the bill will pass into law, some of the act's key elements may inspire Congress to increase the estate tax using other mechanisms should this bill fail. Legislators might also seek to remove well-known tools like trusts to bypass taxation upon your death to generate revenue for federal programs.

View of The United States Capitol Building home of the USA Congress through colorful flowers in Washington, D.C.

For the 99.5% Act: Proposal to Congress

In a letter to Congress, 51 national organizations supporting Senator Sanders's and Representative Gomez's estate tax reform urge congressional members to adopt the legislation. The letter cites that the richest one percent of Americans own nearly 32 percent of the nation's wealth, and the bottom 50 percent own just 2 percent. This stark inequality creates constraints and financial growth limitations for the majority of Americans.

The Sanders–Gomez proposal strives to reverse this trend and increase the estate tax rate currently in place, topping out at 65 percent on estates over one billion dollars. In contrast, President Biden's campaign estate tax plan would retain the 40 percent estate tax rate currently in place. Much is unknown, but one thing is clear: change is on the table regarding inheritable asset and gift tax classes.

For the 99.5% Act: Effect on America

The Joint Committee on Taxation (JCT) believes the Sanders bill can raise $430 billion over ten years. Some of the bill's main provisions (remember these are only proposals right now; no laws have been changed) that generate this revenue include the following proposals:

  • Gift tax exemption reduction from $11.7 million to $1 million
  • Federal estate tax exemption reduction from $11.7 million dollars to $3.5 million
  • Increase in gift and estate tax rates from 40 percent up to a top rate of 65 percent. But note that this 65 percent rate applies only to estates over $1 billion:Hand hold a coin to stack and money bag of tree.
    • The amount of an estate over $3.5 million but under $10 million would be taxed at 45%
    • The amount of an estate over $10 million up to $50 million would be taxed at 50%
    • The amount of an estate over $50 million but under $1 billion (that's 1,000 million!) would be taxed at 55%
    • The amount of an estate over $1 billion would be taxed at 65%.
    • (This is more complex that it appears as transfers and other areas greatly complicate matters. This information is mostly for a rough example, not to be used for your own tax planning.)
  • Elimination of the short-term Grantor Retained Annuity Trust (GRAT) with no "grandfather" exemption for existing trusts
  • Grantor trust inclusion in a decedent's estate. (Many irrevocable trusts are grantor trusts for income tax purposes, although trust assets are excluded from the grantor's estate for federal tax purposes. Enacting "For the 99.5% Act" into law could end the Grantor Trust type of estate planning. Additionally, without very careful planning, Irrevocable Life Insurance Trusts might no longer provide shelter for life insurance proceeds from estate taxation.)
  • Elimination of minority discounts on valuations for the transfers of non-business assets held in a business entity such as a partnership or limited liability company controlled by or majority-owned by members of the same family
  • Elimination of certain marketability discounts for passive assets not used in an active trade or business (This type of tax language is but one reason of many why McCreary Law Office says a good CPA needs to be on your team.)
  • The implementation of a federal 50-year rule against perpetuity will result in estate taxation at some point for Dynasty Trusts (Interestingly, the Texas legislature has just finally voted to amend its rule against perpetuity of the long-standing 21-year rule.)

The For the 99.5 Percent Act would provide beneficial valuation rules for small businesses and farms as well as land subject to qualified conservation easements. The Sanders-Gomez bill would give family farms extra protection by allowing lower assessed value on farmland up to three million dollars, exempting even more farms from tax. But those larger ones could feel a tax squeeze.

Overall, there is overwhelming public support to raise taxes on Americas' wealthiest. Still, some of these inheritance tax rate changes will affect the so-called "middle-class millionaires" who will need to restructure their current estate plans if the For the 99.5% Act is passed into law. Especially important is that many of our nation's farming and ranching families could be squeezed into very difficult positions under some of the proposed changes. The proposed tax rate of 45 percent on estates between 3.5 to 10 million dollars will affect family generational wealth more so than the top tax rates for mega multi-millionaires and billionaires.

McCreary Law Office is watching this legislation and takes potential changes into account as we design your plan. But working jointly with your CPA and financial planner is also part of the team approach as we find the best solutions for your family.

If these changes affect you or if you're ready to move forward with your estate planning, please reach out to the office. You may contact McCreary Law Office or call the Jacksonville, FL office at 904-425-9046 or the Houston, TX office at 713-568-8600.