Fair Warning

Not to be an alarmist, but rather to provide fair warning. You should anticipate changes in the estate tax laws. As proposed these changes will dramatically affect your estate plans and succession intentions. You should expect lower exemption amounts, higher tax rates, and the elimination of some valuable planning strategies.

Senator Bernie Sanders has introduced, and the Biden Administration has shown support for “FOR THE 99.5% ACT1.” This legislation is targeted to tax the wealth of America’s top 0.5%. But don’t let the title fool you; most farming professionals and family business owners fall into the 0.5% as referenced in the Senator’s proposal.

By Bernie’s own account and according to his written proposal, “this legislation:

  • Exempts the first $3.5 million of an individual’s estate from the estate tax.
    This plan would only impact the wealthiest 0.5 percent of Americans who inherit more than $3.5 million ($7 million for married couples). 99.5 percent of Americans would not see their taxes go up by one penny under this plan.

  • Establishes a new progressive estate tax rate structure as follows:
    • 45 percent of the value of an estate between $3.5 million and $10 million;
    • 50 percent of the value of an estate between $10 million and $50 million;
    • 55 percent of the value of an estate between $50 million and $1 billion; and
    • 65 percent of the value of an estate in excess of $1 billion.
  • Ends tax breaks for dynasty trusts.
    Billionaires like Sheldon Adelson and the Walton family, who own the majority of Walmart’s stock, have for decades manipulated the rules for trusts to pass fortunes from one generation to the next without paying estate or gift taxes. This bill would:
    • Strengthen the “generation-skipping tax,” which is designed to prevent avoidance of estate and gift taxes, by applying it with no exclusion to any trust set up to last more than 50 years.
    • Prevent abuses of grantor retained annuity trusts (GRATs) by barring donors from taking assets back from these trusts just a couple of years after establishing them to avoid gift taxes, while earnings on the assets are left to heirs tax-free. The lawyer who invented this technique for the Waltons claims it has cost the Treasury $100 billion since 2000.
    • Prevent wealthy families from avoiding gift taxes by paying income taxes on earnings generated by assets in “grantor trusts.”
    • Sharply limit the annual exclusion from the gift tax – which was meant to shield the normal giving done around holidays and birthdays from tax and recordkeeping requirements – for gifts made to trusts.
  • Closes other loopholes in the estate and gift taxes.
    One of these loopholes involves “valuation discounts,” restrictions placed on interests in family businesses which are claimed, falsely, to reduce the value of the estate. Another loophole involves claiming that the value of an inherited asset is lower, for estate tax purposes, than what is claimed for income tax purposes to calculate gains when the asset is sold.

  • Protects farm land and conservation easements.
    The bill would protect family farmers by allowing them to lower the value of their farmland by up to $3 million for estate tax purposes. The bill would also increase the maximum exclusion for conservation easements to $2 million.”

For comparison, the current estate tax exemption rate is $11.7 million/person (or $23.4 million/couple) and the estate tax rate is 40% for estate over $23.4. We use Dynasty Trusts in most planning situations (Dynasty Trusts provide asset protection as well). And, valuation discounts may provide substantially more help than the $3 million farmland reduction proposed in the bill.

The good news is, it doesn’t look like the law will be enacted retroactively as originally anticipated. So, there’s still time to act. To reduce your exposure to the estate tax and prepare for an efficient transition to the next generation you should review existing plans. Have you:

  1. Maximized your lifetime exemption?
  2. Included valuation discounts?
  3. Adequately protected your assets?

Estate tax plans can take months to develop. Even the simplest plan may require a real estate appraiser, valuation expert, tax planner, legal counsel, and a financial advisor, all of whom are busy and committed to helping other clients. The time to act is now.

Make good decisions and take decisive actions today.

1FOR THE 99.5% ACT – Summary of Sen. Bernie Sanders’ legislation to tax the fortunes of the top 0.5%