Dear Clients and Friends:

Since our alert last week concerning the For the 99.5% Act introduced by Senator Sanders (D-Vt) and Whitehouse (D-RI) that increases the estate, gift, and generation skipping taxes, Senator Chris Van Hollen (D-Md), joined by Senators Cory Booker (D-NJ), Sanders, Whitehouse, and Elizabeth Warren (D-Mass), have introduced the Sensible Taxation and Equity Promotion (STEP) Act which allegedly “addresses the stepped-up basis [at death] loophole” by taxing unrealized gains at death and when making gifts. As written, it would tax unrealized gains on gifts made after December 31, 2020 or testamentary transfers of assets on deaths after that date. It would further tax unrealized gains in trusts every 21 years. Gains on death could be paid over 15 years. Furthermore, gains inherent in “grantor trusts” would be taxed on the grantor’s death. It is important to keep in mind that these are proposed bills and that a lot may change during House and Senate negotiations, including procedural hurdles related to filibuster. There are also many exceptions and exclusions. Nevertheless, it is important to recognize that some of the provisions of this bill are retroactive to January 1, 2021. Furthermore, various provisions under the For the 99.5% Act are relevant to transactions after the date of enactment of the law, whereas the increase in the estate and gift tax themselves are not applicable until the calendar year after date of enactment.

It is also important to keep in mind that incoming Senate Finance Committee Chairman Ron Wyden (D-Or) is seeking a “mark- to- market” approach to marketable securities, whereby unrealized gains would be taxed each year. A deduction would be allowed for any loss. Today, gains and losses only occur when they are realized by a sale or exchange. Furthermore, for non-publicly traded property, a penalty would accrue and grow over time for as long as property were held, denying tax deferral on unrealized gains. There will be much debate concerning such a tax by economists, politicians, and academics before this type of proposed legislation becomes law, but one thing is for certain- our current government is out to tax wealth! Commentators believe that compromise will result in one of the following: (1) either no step-up in cost basis at death with heirs inheriting historic basis; a tax on gains as proposed by the STEP Act; or the mark-to-market approach advocated by Senator Wyden. It is possible though, that some form of combination of approaches is enacted.

As a reminder, with certain exceptions, provisions under the For the 99.5% Act are intended to apply in calendar years beginning after the date of the enactment of this Act. So, if passed in 2021, it would become applicable to transfers by gift and by death occurring in 2022. The Act, among other provisions, provides for:

• A reduction of the estate tax exemption from its current $11.7 level to $3.5 million. This amount is indexed for inflation
• A reduction of the gift tax exemption from $11.7 to $1 million, while reducing the annual per person exclusion from $15,000 to $10,000 and $20,000 in total to everyone per year. These amounts are not indexed for inflation.
• A reduction and limitations on the use of generation skipping exempt trusts by reducing the duration of exempt status and the amount of exemption to conform with reduced estate and gift tax exemptions.
• Increased estate and gift tax rates to 45% on amounts over $3.5 million; 50% on amounts over $10 million; 55% over $50 million; and 65% on amounts over $1 billion.
• Elimination of, or restrictions on, a host of other common estate planning tools, trusts, and methods of valuation.
Simultaneously, the Biden Administration has called to increase audits. IRS Commissioner Rettig informed a congressional panel that increasing audits and IRS personnel could generate an additional $175 billion in tax revenues. The agency has lost 15,000 enforcement personnel since 2010.

It is imperative to take action to preserve exemptions and planning opportunities, and in doing so, to recognize that some of the proposals have retroactive effective dates; others are as of date of enactment; and others commence during the calendar year following enactment. There is no certainty, so building in flexibility becomes essential. Use of gift tax exemptions now should be considered; considering making taxable gifts now and paying tax on estates that are not otherwise taxable; and capturing valuation discounts and low interest rates through transactions pre-dating effective dates should all be considered.

If you have any questions concerning the application of this proposed legislation on your circumstances, please feel free to contact us.

Joseph C. Kempe

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