Wealthy Should Act Now to Prepare for Bernie Sanders’s Estate Tax Proposal

Anyone with an estate of $3.5 million or more should think about getting in line now to talk to an estate professional, because offices everywhere are busy dealing with proposed changes to our estate and gift tax policies.

A man reads in an opulent, stark white home.
(Image credit: Getty Images)

On March 25, 2021, Sen. Bernie Sanders and the White House formally proposed a bill called “For the 99.5% Act” — so called because it aims to tax the wealthiest 0.5% of Americans — which proposes to change our current estate and gift tax system.

While there’s no telling whether this proposed law will be enacted, it seems best to “plan for the worst and hope for the best,” given the unpredictable political climate, and the possible changes that may be made if a watered-down version of this potent proposed law passes.

Some Basics of the 99.5% Act

One of the main features of the 99.5% Act is that it would cut the federal gift & estate tax exemption amount from the current $11.7 million to $3.5 million. The good news is that the reduction would not occur until Jan. 1, 2022. The same timing applies for the bill’s proposed reduction of the gift tax allowance to only $1 million, which means that people will not be able to gift more than $1 million after 2021 without paying a gift tax.

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The current maximum federal estate tax rate is 40%. The 95% Act proposes to increase the estate tax rate to 45%, once a deceased person’s taxable estate exceeds $3.5 million, and 50% and higher when the amount subject to tax exceeds $10 million, maxing out at 65% for estates over $1 billion. But that increase would not apply until 2022. In addition to the above exemption and tax changes, gifting of up to $15,000 per year per person would be limited to $30,000 per donor per year for gifts to irrevocable trusts or of interests in certain “flow through entities” beginning in 2022.

Estate Strategies Could Change Drastically

The tougher news for many of our readers is that some of the primary tools and strategies that we have successfully used in the past will not be available in the future. These changes would begin on the date President Biden signs the bill into law, if indeed this occurs. Once that happens, we would not be able to fund or have assets sold to Irrevocable Trusts that can be disregarded for income tax purposes. And we would not be able to use valuation discounts or Grantor Retained Annuity Trusts (GRATs) in most circumstances. However, those arrangements put into place before the new law is passed will be grandfathered, as long as they are not added to or altered after the law is passed, as presently written.

This is an important call to action for families having assets expected to exceed $3.5 million per person. These individuals will need to take a serious look at their present planning situation to determine whether to take immediate steps to avoid death taxes.

Readers who have irrevocable trusts may want to act without delay to extend any notes that may be owned by them to the longest period practical. They might consider selling certain assets that may go up in value and exchange them for assets that may be more suitable to be owned by these trusts, given that exchanges and changes made after a new law is passed may not be possible.

Push to Eliminate Step-Up in Basis: A $1 Million Exemption

During his 2020 campaign, President Biden proposed and urged an elimination of the tax-free step-up in basis at death presently afforded by the Tax Code. The basis adjustment at death has been part of the Code for decades but has progressively been targeted as a means to raise revenue.

According to a summary published by Sen. Chris Van Hollen, the Joint Committee on Taxation estimates the tax-free step-up in basis will cost the United States approximately $41.9 billion in tax revenue in 2021 alone. Further, this summary asserts that 55% of the wealth in estates over $100 million is untaxed capital appreciation, currently benefiting from a tax-free step-up in basis.

The STEP (“Sensible Taxation and Equity Promotion”) Act would tax unrealized capital gains on death, effective for deaths after Dec. 31, 2020. However, the Act includes a few “softeners”:

  • A $1 million exemption to protect smaller estates.
  • Up to 15 years to pay the tax for illiquid assets, like business entities and farms.
  • A deduction against the estate tax (for the gains taxes due) for larger estates.

Nevertheless, the taxation of previously untaxed gains would be a major change in federal tax policy, with wide-ranging implications on estate planning. Especially for clients with depreciated real estate, the impact could be far-reaching. It would also greatly complicate the administration of estates, as there would now be a need for fiduciaries to figure out what the historical tax basis might be for assets.

Due to these anticipated possible changes, most estate and trust law firms have been exceedingly busy with estate tax planning since the middle of last year and are generally operating at capacity. If you wish to complete an estate tax plan or have put your estate planning off for far too long, now is the time to get yourself into queue and get this done, putting your plan into action before any new laws may pass.

As with most firms, we give immediate focus to those who contact us without delay and have plans in place or in progress. If you do not have an estate tax planning structure or a plan in process, we recommend you start before the demand for these services causes many firms to be unavailable to finish before a new law may be enacted.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Jeffrey M. Verdon, Esq.
Lead Asset Protection and Integrated Estate Planning Partner, Falcon Rappaport & Berkman

Jeffrey M. Verdon, Esq. is the lead asset protection and tax partner at the national full-service law firm of Falcon Rappaport & Berkman. With more than 30 years of experience in designing and implementing integrated estate planning and asset protection structures, Mr. Verdon serves affluent families and successful business owners in solving their most complex and vexing estate tax, income tax, and asset protection goals and objectives. Over the past four years, he has contributed 25 articles to the Kiplinger Building Wealth online platform.