Estate Tax Planning May Become More Important

By George Paulsen, CPA, Tax and Advisory Partner of  Hood & Strong LLP

There is a lot of pending legislation in Congress right now. Of note, Senator Bernie Sanders is proposing a far-reaching estate tax that would apply to the top 0.5 percent of American taxpayers, which he is calling the “For the 99.5% Act.” According to the Joint Committee on Taxation, this estate tax could potentially raise $430 billion over the next 10 years. But this is misleading, as to get to the projected revenue, the estate tax exemption we have now – $11.7 million per individual – would be lowered to $3.5 million per individual.

The bill has several revenue-raising features. Currently, the tax rate on an estate over $11.7 million is 40 percent. Under Sanders’ proposal, the tax rate would start at 45 percent on amounts over $3.5 million, go to 50 percent on estates over $10 million, and scale up to 65 percent on estates over $1 billion.

Estate planners use several tools to reduce estate taxes and this bill would remove them from our tool chest. One commonly used instrument is valuation discounts on assets at death. As an example, if a father and mother own 49 percent of a rental property and their two children own 51 percent in a family limited partnership, upon one parent’s death we may be able to discount that parent’s share of the appraised value by up to 40 percent, depending on factors such as lack of control or marketability. This act would remove that option.

We often suggest that parents or grandparents make gifts to children and grandchildren to slow accumulation of wealth and move it down one or two generations. This proposal would also sharply limit the annual gift tax exclusion.

As our clients live longer and see grandchildren and even great grandchildren grow up, we use generation-skipping trusts and gifting to avoid estate taxes by providing for later generations. There is also a limit in this proposed law to restrict the use of trusts to accomplish this.

There are other tools that will be affected as well, including grantor-retained annuity trusts and other grantor trusts that would now have to pay gift taxes.

The Sanders bill is only a proposal, but it will go into the mix as Congress works on new infrastructure legislation and other spending laws to support those most affected by the COVID-19 pandemic. As we always do, our tax professionals are monitoring this and other proposals as they move through the House and Senate. Because this proposal has the potential to raise significant funding, it could well be made law and become effective later this year or next. We will keep you informed.

Contact AEIS Today

As one of the leading employee benefits firms in the Bay Area, AEIS, Inc. has a wide network of experts and partners to help you with your business and high-net-worth individual needs, from taxes to HR to payroll. If you need tax help, reach out to us at AEIS, Inc. at  Alyssa@AEISAdvisors.com  if you would like to be connected with  George Paulsen  and his team of tax advisors and CPAs at  Hood & Strong, LLP .

This post was originally published in Hood & Strong’s Newsletter.

Disclaimer: Any information related to compliance or other subject matters in this blog is intended to be informational and does not constitute legal advice regarding any specific situation. The content of this blog is based on the most up-to-date information that was available on the date it was published and could be subject to change. Should you require further assistance or legal advice, please consult a licensed attorney.