On March 25, 2021, Senator Bernie Sanders introduced legislation entitled “For the 99.5% Act.” The aim of the bill is to tax the fortunes of the top 0.5% of wealthy Americans.
This is the first piece of legislation introduced since Joe Biden came into office and is designed to lower the U.S. federal estate tax exemption. Highlights include:
regarding personal wealth:
- Reduce the U.S. federal estate tax exemption to USD $3.5m for U.S. citizens / domiciliaries (Note: There is no mention of the $60,000 exemption being reduced or eliminated for non-U.S. citizens and non-domiciliaries with U.S. sitused assets).
- Reduce the U.S. federal gift tax exemption to USD $1m for U.S. citizens / domiciliaries with an effective date for gifts made after December 31, 2021.
- Increase the progressive federal gift and estate tax rate to 45% for the excess value over USD $3.5m, 50% for the excess value over USD $10m, 55% for the excess value over USD $50m and 65% for the excess value over USD $1bn.
- The effective dates for the foregoing changes will be for decedents dying after December 31, 2021, and for gifts made after December 31, 2021.
regarding wealth held in grantor trusts:
- Ending of the basis step up on death for assets held through a grantor trust, if those assets are not already included at the time of death.
- There will be a minimum 10-year term and a 25% minimum value for the remainder interest for retained annuity trusts.
- Elimination / reduction of discounts for transfers of interests in entities such as family limited partnerships that are not conducting an active trade or business.
- The effective dates for the foregoing changes would be for transfers made after the date of enactment of the legislation.
regarding dynastic trusts:
- Constrain the ability to create dynastic trusts (trust period greater than 50 years) that are exempt from generation-skipping transfer taxes.
- The effective date for this change will be on the date of enactment of the legislation.
regarding distributions from a trust:
- Distributions to beneficiaries will be subject to U.S. federal gift tax.
- The effective date for this change would be for trusts created after the enactment of the legislation, or in relation to trusts created before the enactment of which contributions are made to such trust after the enactment of the legislation.
regarding the annual gift tax:
- Sharply limit the annual gift tax exclusion to no more than USD $20,000 per donor for certain types of transfers such as transfers to trusts.
- The effective date for this change shall apply to any calendar year beginning after the date of the enactment of the legislation.
This is in step with a new federal wealth tax proposed by Senator Elizabeth Warren on March 1, 2021.
It is not clear if such changes will eventually pass the U.S. Congress and be enacted into law. What is certain is that high new worth individuals do need to start thinking about alternative investment migration options for these developments are only the tip of the iceberg that is yet to come.