With the Senate divided 50-50, it was expected that any changes to the tax code would need to be accomplished via the use of the Senate’s reconciliation process. Reconciliation allows for bills related solely to the taxing and spending powers of Congress to be voted on and passed by a simple majority without needing to have the 60 votes otherwise required for cloture and to end any filibuster of the bill.

Historically, reconciliation has been available for use one time per each governmental fiscal year that begins each October. Typically a reconciliation bill has both a taxing component for revenue and a spending component for expenses. In March, the Senate used the reconciliation process to pass the American Rescue Plan Act of 2021. It was expected that any other use of reconciliation would not occur until the 2022 fiscal year begins in October. In a surprise ruling this week, the Senate Parliamentarian ruled that an additional reconciliation bill could be utilized prior to October.

The Parliamentarian’s reasoning was that the American Rescue Plan Act of 2021 had no taxing components for revenue generation. Therefore, should Congress decide to revise their budget resolution, they could include reconciliation instructions for a second 2021 bill with a taxing component for revenue generation. Thus, a second bite at the reconciliation apple may occur.

What does all this mean for estate planning for multi-generational families? As mentioned in our article earlier this year, The Time to Act is Now!, Senator Bernie Sanders filed a bill in late March titled “For the 99.5 Percent Act.” If passed, many of the estate planning tools utilized in the past would be radically changed and effectively eliminated from use. Items in his proposed legislation include:

Estate and gift tax proposals beginning January 1, 2022

• Estate exemption lowered to $3.5 million
• Gift exemption lowered to $1 million
• Estate and Gift tax rates are increased from 40% for those estates and gifts in the following brackets:
  • Over $3.5 million to $10 million – 45%
  • Over $10 million to $50 million – 50%
  • Over $50 million to $1 billion – 55%
  • Over $1 billion – 65%
• Because the generation-skipping tax is the highest rate, if enacted the new generation-skipping tax rate would be 65%

Estate and gift tax proposals with an effective date of transactions occurring on or after the bill’s enactment date

• Elimination of valuation discounts for lack of control and marketability where the family either has control of the entity or owns the majority of ownership by value
• Grantor retained annuity trusts (GRAT) must have a minimum term of 10 years
  • In addition, the gift value at creation of the GRAT interest must be valued at the greater of 25% of the fair market value (FMV) of the trust property or $500,000, but not more than the value of all property transferred to the GRAT
• Generation-skipping transfers are free of generation-skipping tax for a limited period of 50 years
  • The effect is that generation-skipping distributions from existing trusts that occur after the 50-year period are subject to generation-skipping tax
• Grantor trusts would be included in the estate of the Grantor at his or her passing if the trust was created or contributions were made to an existing trust after the enactment date
• Annual exclusion gift limits would be reduced to $10,000 from $15,000
  • Each donor may only transfer a cumulative annual limit of $20,000 for transfers to trusts, transfers of pass-through entities, transfers of interest subject to a prohibition on sale and any other transfer that cannot be liquidated immediately by the donee

A second bill was filed by Senator Chris Van Hollen titled “Sensible Taxation and Equity Promotion Act of 2021.” It has a number of income and estate proposals as well, including:

• Capital gains would be realized when property is transferred via gift or at death
  • Property in grantor trusts would be treated as sold when transferred to another person, the grantor dies or the grantor is no longer treated as the owner
  • In addition, if the property is no longer considered to be in the grantor’s estate, a deemed sale is to occur
  • There are exceptions for transfers to U.S. citizen and permanent resident spouses if the spouse is the only beneficiary
  • The first $1 million of gains would be excluded at death and individuals may use up to $100,000 of that during their life for gifts
• Non-grantor trusts would have their assets treated as sold every 21 years
• The majority of these income tax provisions would have a retroactive effective date of January 1, 2021

In addition, President Biden announced his “Made in America Tax Plan” which focuses on corporate tax reform that would increase the corporate income tax rate from 21% to 28% along with other provisions for a corporate minimum tax.

If these proposed bills are passed, the future use of grantor trusts, grantor retained annuity trusts and valuation discounts will be severely curtailed. While Democrats could pass some form of the proposed bills through the additional reconciliation process, it would still require the unanimity of every Democratic senator to do so. However, waiting and acting after passage provides little benefit.

The increased exemptions currently available along with other estate planning tools would be grandfathered under the proposed bills, if the trusts are created and funded prior to enactment of the legislation. This should serve as an increased call to urgent action by affluent families to engage in the type of multi-generational planning that may no longer be available and to secure their families legacy and preservation of wealth.

For those affluent families that waited to see the outcome of the 2020 election and have delayed planning in order to consider potential changes to the tax law enacted before 2021’s year-end, the time is now. Unlike the Senate’s option to use an additional reconciliation process, a second bite of the apple might not be available for multi-generational families that are planning to utilize the increased exemptions and trust tools currently available.

For those clients that have been delaying, it is time to discuss exemption planning matters with your tax advisors and counsel. Your Oxford team is positioned to ensure that our affluent family clients continue to develop well-thought-out wealth enhancement strategies and implement them timely and efficiently. Consultation with your Oxford team and an analysis of the possible impact of any tax policy changes will allow your full team of advisors to identify the optimal solutions for your family.

The information in this presentation is for educational and illustrative purposes only and does not constitute tax, legal or investment advice. Tax and legal counsel should be engaged before taking any action. OFG-2104-2