Pending Transfer Tax Legislation in an Election Year
“Pending Transfer Tax Legislation in an Election Year,” that’s the subject of today’s ACTEC Trust and Estate Talk.
This is Susan Snyder, ACTEC Fellow from Chicago. We can always count on presidential candidates to propose estate and gift tax legislation during an election cycle. To tell us more about this topic, you will be hearing today from ACTEC Fellow Ron Aucutt of Lakewood Ranch, Florida. Welcome, Ron.
Thank you very much, Susan. This is an election year. Next year there are likely to be some changes –whether they will be small or large, how widespread, who will be affected, who will be the winners, who will be the losers — those are all great things to speculate about, but I have no clue. Polls and predictions are not of great help in this kind of thing; and even so, what we end up with, whether it is what I call a sweep by one party or another of the White House, the Senate and House, or if it is 2:1, like it is now, we really have an even harder time predicting what the legislative agenda is going to be. So, I have taken the safe approach, looking at some things that we already know because this is legislation that has already been introduced and I am going to try to project from that what would happen if, for example, the Republicans have their way or the Democrats have their way or something in between.
Transfer Tax Legislation Hypothesis if Republicans Sweep in 2020
First, while there are some Republicans who would oppose estate tax repeal and some Democrats who would favor it, by and large this has been a Republican agenda and they have been trying since the 1990s to repeal the estate tax. Now they have a couple of current bills that are probably the bills to look to if Republicans gain power or control in these coming elections. Those bills would repeal the estate tax, but they would not repeal the gift tax; and I think that is the most significant thing to remember. The gift tax would be retained. We have heard it said in the past, say 2001, that it is needed, even in the absence of an estate tax, to backstop the income tax. I have never been persuaded by that—that that is really all that important. Although, it plays some role because it discourages the willy-nilly transfer of assets back and forth among people just when there is going to be a realization event or to mash losses and income in the same return and those kinds of things. But I also think that it may very well be that the gift tax will play the role of protecting the estate tax even after the estate tax is repealed.
There will be some who think, given the cycles of political power that we have seen lately, that the estate tax is bound to come back. If it comes back, then we need a gift tax in the meantime so that when the estate tax comes back there are estates left to tax. And it is as simple as that, perhaps. We will see. Probably, for those to be enacted, we would have to have the Republicans keep control of the Senate, gain control of the House and keep the White House.
Transfer Tax Legislation Hypothesis if Democrats Sweep in 2020
If Democrats sweep, then we look to a bill that has been introduced by Senator Bernie Sanders. We know him as a recent, perhaps still current, presidential candidate. Although, you know, he is not actively viewed as being a candidate at this time. Senator Sanders has been introducing legislation about the estate tax at least since 2010 in every Congress, except that the current one is a little more robust. It goes a little farther than the others.
Now, I am going to look to Senator Sanders’ legislation called the For the 99.8 Percent Act, S.309, introduced January 31, 2019. An identical House Bill H.R.4857 was introduced in October 2019 by Congressman Jimmy Gomez of California. I am going to look to this, not because I expect Senator Sanders to become president but because I expect that whatever Democratic leadership gains control or increases their control in this election, they will look to some legislation that has been written. It is in statutory language. It‘s on the shelf. It is ready. It has, so to speak, stood the test of time because it has been around so long, and it does not take long, as we know. For the 99 Percent Act — is the name and it is clear to tell where Senator Sanders is going with that and the folks that he intends to benefit. And it is important to notice that his legislation would make the estate tax a lot more robust, rates of 45 percent, 50 percent, 55 percent, 77 percent, which would cut in at a rate, of taxable estate that is, of over 1 billion dollars. The basic exclusion amount would go back to 3.5 million dollars, not indexed for inflation, and for gift tax only 1 million dollars, not indexed for inflation.
Now, listeners might recognize those exclusion amounts as what we had in 2009. They might not recognize all of those rates, but we have had every single one of those rates in the lifetimes of some of us. Forty-five percent was the top rate in 2007–2008–2009, 50 percent in 2002, 55 percent from 1984 to 2001, and 77 percent was the top estate tax rate from 1941 until 1976. And even in 1976, that did not mean we had the same tax. We had a higher tax because that 77 percent rate started at a taxable estate of about 10 million dollars, not 1 billion dollars. So, even without regard to inflation, Senator Sanders’ radical proposal is less than the estate taxes we have actually seen, as I say, in many of our lifetimes.
Now, what else would he do? There are some structural and substantive suggestions as well. Before I get into that, though, I want to ask the question that now people are thinking in their own minds. Why do we care? Why do we care if he is not going to be the president? Let me tell you, even if there is not a Democratic sweep, even if the Republicans keep the White House, or keep the Senate or both, or regain the House or some mix-up like that, let me tell you what happened in 2015. A Republican-controlled House and a Republican-controlled Senate, needing to raise some revenue for the highway trust fund, pulled off the shelf the consistent basis rules that many of us know about and are kind of annoyed by. Where did they get that? They got it from a series of bills beginning with what had been introduced in June 2010 by Senator Bernie Sanders. You see a proposal like this long enough, introduced enough times; it is on the shelf and it raised just the right amount of money for the highway trust fund needs at the time, even though the legislation had nothing to do with potholes, only loopholes.
Now as we go through these next things, I want you all to think that these are possible agenda items in a Democratically-controlled government and here and there possibly pull off the shelf Republican items, even if Republicans control one House or both or the White House. We talked about rates and exemptions. Sections 3 through 5 of Senator Sanders’ bill would provide relief for special valuation for farms and businesses and relief for conservation easements. You probably will not find Republican support of that because they see that as just a cop-out, as a way to avoid repeal. But Section 5 of Senator Sanders’ bill would extend the consistent basis reporting rules, — remember them — to gifts as well as estates. Well, of course, that could conceivably be picked up as a revenue raiser because its 2015 estate counterpart did, and notice the title is consistent basis. There is something appealing about consistency.
Section 6 is about the value of non-business assets. For estate and gift tax purposes, whenever there is a transfer of an interest in an entity that is not actively traded, the non-business assets would be valued on a look-through basis, as if they were held directly by the transferor and no discount for lack of control in many cases. That is not a very likely revenue raiser pickup in the absence of a Democratic sweep, partly because any Republican dabbling with reducing entity-based valuation discounts is going to recall the nightmare of the proposed Section 2704 Regulations, and is going to marshal 2,000, 3,000, wherever we finally stop counting of comments that came in that were resisting that.
Section 7 of Senator Sanders’ bill would tighten the rules for GRATs. It would require the minimum term to be 10 years, but most importantly, it would require that the gift tax value at the start would be at least 25 percent of the value transferred. No near zero out, unless your notion of near zero is 25 percent. That is a possible revenue raiser pickup also, but may be with that minimum 25 percent omitted.
Section 8 is about grantor trusts. Basically, Senator Sanders would provide consistency between grantor trust rules and the estate and gift tax rules. There is that word consistency again. Look out! Because that makes it appealing whether it really is or not. A new Chapter 16 with a new Section 2901, all to itself. If the grantor is the deemed owner or if another person is the deemed owner if that person engages in a sale, exchange or comparable transaction with the trust that is disregarded for purposes of subtitle A — think BDOT, BDIT. Then Section 2901 would treat any distribution during the grantor’s life as a gift. The cessation of deemed owner status during the deemed owner’s life as a gift and would include the value of anything left in the trust at the deemed owner’s death, if grantor trust status has not yet terminated in the deemed owner’s gross estate. This is an unlikely revenue raiser pickup, perhaps because of the negative attention it would attract and the transactional and transitional disruption it could create. What about all these trusts that are in existence and that kind of thing? But again, consistency has such a curb appeal that it is hard to rule this out.
Two more. Section 9, elimination of the GST exemption for certain long-term trusts. Now the Obama Administration would have said, “Ninety years, we are going to reset the inclusion ratio to one.” This says 50 years, but that is not all. It says it is got to be likely or impossible that it would last 50 years, even from the start. Well that means this is not a wait-and-see thing. It is going to have to have a duration no greater than 50 years or it is going to have an inclusion ratio of one from the beginning. Possible revenue raiser, no matter who controls the government, but frankly, the GST tax which is imposed on transfers way down the road usually does not raise much revenue in the first 10 years and that is what they look at for budget purposes.
Finally, Section 10 is titled—I’m going to read this, I’m not making it up—Simplifying Gift Tax Exclusion for Annual Gifts. Notice how pretty that sounds. Simplifying. Well, perhaps it would because it would eliminate most of the annual exclusions that we like to tweak the IRS with and from the IRS point of view, it would eliminate a lot of things they have been fussing about. Any transfer in trust, any transfer of interest in pass-through entities, any transfers subject to prohibitions, other restrictions on sale, in other words just about everything the IRS does not like and has litigated in the past. For such transfers, there would be, of course, the annual basic, as we know it, per donee 15,000 dollars today limit. But for these kinds of transfers I just described, there would be, in addition, to be satisfied an annual per donor limit — that means just once per year — per donor of double that amount. So, the good news is it is double. It is 30,000 dollars, but the bad news is that it is per donor and there is only one per year and the donor has to spread those around—the annual exclusion gifts—that were as otherwise, there was sometimes as we have seen in some of the cases, no limit. There would be no change to gift splitting or the unlimited exclusion of certain direct payments of tuition and medical expenses — a possible but unlikely revenue raiser pickup.
That concludes my survey of current legislation and the prospects that it might have going forward. Don’t look for anything this year, but after the election and next year and when things settle out, maybe later in 2021, more likely I guess 2022. Let’s wait and see. Thank you all very much.
Thanks, Ron. Thank you for your consistent wisdom on estate and gift tax legislative proposals during these interesting times.
This podcast was produced by The American College of Trust and Estate Counsel, ACTEC. Listeners, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel. The material in this podcast is for information purposes only and is not intended to and should not be treated as legal advice or tax advice. The views expressed are those of speakers as of the date noted and not necessarily those of ACTEC or any speaker’s employer or firm. The information, opinions, and recommendations presented in this Podcast are for general information only and any reliance on the information provided in this Podcast is done at your own risk. The entire contents and design of this Podcast, are the property of ACTEC, or used by ACTEC with permission, and are protected under U.S. and international copyright and trademark laws. Except as otherwise provided herein, users of this Podcast may save and use information contained in the Podcast only for personal or other non-commercial, educational purposes. No other use, including, without limitation, reproduction, retransmission or editing, of this Podcast may be made without the prior written permission of The American College of Trust and Estate Counsel.
If you have ideas for a future ACTEC Trust & Estate Talk topic, please contact us at ACTECpodcast@ACTEC.org.
© 2018 – 2023 The American College of Trust and Estate Counsel. All rights reserved.
Latest ACTEC Trust and Estate Talk Podcasts
Estate planning attorneys discuss differences in legal traditions and post-mortem rules with creditors, probate, and trust administrations in different states.
Considerations in the Possible Liquidation of a Closely Held Entity and Other Alternatives (Pt. 4 of 4)
The final part of the Closely Held Entities series explores potential liquidation, including audit, valuation and tax issues, and where it may make sense not to liquidate.
In part 3 of Closely Held Entities, estate planners examine critical issues as well as discuss conducting a lifetime stress test for those entities.