Tax Planning

For the 99.5% Act: A summary

By James Hancock | 22 Apr, 2021

Following a successful democratic election joint with the monetary stimulus, tax reform has been a hot topic.

With the introduction of the ‘For the 99.5% Act’, we have the first glimpse of the potential changes on the horizon. It is key to note this is the first iteration of the bill and it has not yet been passed, although it is probable that similar modifications may be enacted.

What are the key features of this bill for Private clients?

1. Exemptions

President Biden has been talking about this for a while and it looks like it’s finally getting some traction.

Current legislation – Introduced in 2017, the gift and estate tax exemption for 2021 totals $11.7 million ($23.4 million for married couples).

The annual gift allowance is currently $15,000 per donee.

Proposal – Under the new proposal this would be replaced by a Federal estate tax exemption of $3,500,000 and a lifetime gift tax exemption of $1,000,000. Through the separation of the gift and estate taxes, this means in future one will not be able to gift greater than the gift exemption without incurring additional gift taxes.

The annual gifting exemptions to be dropped to $10,000 per donee.

2. Estate Tax Rates

The most significant change to attract tax from wealthy families is the movement from a flat tax rate on Federal gift and estate tax rates to a progressive tax scheme.

The move from a flat rate of 40% on assets in excess of the current exemptions, to a progressive tax system with the highest rate of 65% outlined below:

Bands Tax Rate
$3.5 million to $10 million 45%
$10 million to $50 million 50%
$50 million to $1 billion 55%
More than $1 billion 65%
3. Trusts

Trusts are a key tool in tax planning. The reforms are looking to implement restrictions that means the following trusts may require some work:

Dynastic trusts which exist in permanence and are commonly used as vehicle to pass wealth onto the next generation(s) without attracting estate taxes. The new bill proposes a limit to any trusts lasting for greater than 50 years, effectively triggering a taxable event for estate taxation purposes.

GRATs (Grantor retained Annuity Trusts) will have a minimum term imposed of 10 years and minimum gift requirements on funding.

Defective Grantor Trusts have a new provision stating that a trust funded by a grantor after date of legislation is considered to be owned by the grantor, for both income and estate tax

What can you do to prepare?

Although it is impractical to ascertain which changes will be enacted, it is likely that changes are to come and prudent to review or plan for the impending amendments to estate and gift tax system. On a more positive note, the reforms would not likely occur until the 2022 tax period (1st January 2022).

This allows individuals and families time to review their financial plans in place and the ability to adapt where appropriate to prepare for the new regime. Some of the potential courses of action may be:

  • Make use of the $11.7 million estate and gift exemption before it is lowered under the ‘use it or lose it’ system.
  • Review current trust structures and the effect of the proposal on current arrangements.

Please note the changes listed above are not an exhaustive list of the proposed changes and are those most relevant to our US connected families, should you require advice or assistance in relation to your personal circumstance please reach out to one of the team.