by Terri Getman, J.D.*, CLU, ChFC, RICP, AEP (Distinguished)
Two bills introduced in the Senate in March could significantly change estate planning if enacted into law. The 99.5% Act and the Sensible Taxation and Equity Promotion (STEP) Act would dramatically alter transfer taxes. While it is still uncertain which, if any, provisions in these acts will become law, it is still important to be aware that the bills contain the following provisions:
- Reduces the federal estate tax exemption from $11.7 million to $3.5 million for U.S. citizens and residents.
- Reduces the federal gift exemption from $11.7 million to $1 million for U.S. citizens and residents.
- Taxes unrealized capital gains in non-grantor trusts, including existing trusts, beginning in 2026.
- Ends tax breaks for Dynasty/GST trusts (generation-skipping transfer trust) by imposing tax every 50 years.
- Increases the federal estate and gift tax rate from a top bracket of 40% to a more progressive federal estate and gift tax rate ranging from 45% (for values starting at $3.5 million) up to 65% (for values exceeding $1 billion).
- Includes grantor trusts as part of the grantor’s taxable estate, thereby impacting and potentially eliminating many common estate planning strategies such as ILITs
(Irrevocable Life Insurance Trusts) and IDGTs (Intentionally Defective Grantor Trusts) by including assets in the estate of the grantor.
- Imposes a capital gains tax on built-in gain on property gifted subject to a $100,000-lifetime exclusion and exclusion for transfers to charities, spouses who are U.S. citizens or
long-term residents, and grantor trusts that are included in the grantor’s estate.
- Significantly reduces the ability to discount values for minority/lack of control for non-active, closely held business interests, transferred where a family owns 50% or more in vote or value.
- Reduces the effectiveness of GRATs (grantor retained trusts) by requiring a 10-year minimum period and minimum 25% remainder value, thereby prohibiting the use of “zeroed-out” GRATs.
- Imposes a capital gains tax on built-in gain on the property transferred at death, and subject to a $1 million exclusion and exclusion for transfers to charities and spouses.
Limits annual exclusion gifts to two times the effective amount or $30,000 for transfers to trust or pass-through entities.