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What You Need to Know about the 99.5 Percent Act

You may have heard about the 99.5 Percent Act, which was introduced by Senators Bernie Sanders and Sheldon Whitehouse in March. If passed, this legislation will make major changes to estate taxes and who pays them.

What will change if it passes?

The proposed law would require more estates to pay estate taxes. Currently, the estate tax exemption is $11.7 million for an individual and $23.4 million for a couple. The new exemption amount will be reduced by 70%, with the new proposed exemption at $3.5 million for an individual and $7 million for a couple. Any estates under that amount will not have to pay a federal estate tax, but those over will have to pay a tax based on the value of the estate.

The amount paid toward estate taxes would increase. Right now, the current estate tax rate is 40% for anything over the previously mentioned exemption amounts. With the 99.5 Percent Act, estates would be taxed based on the value of the estate. Here’s what the proposed structure looks like:

  • $3.5 million to $10 million: 45% tax rate
  • $10 million to $50 million: 50% tax rate
  • $50 million to $1 billion: 55% tax rate
  • Anything over $1 billion: 65% tax rate

The lifetime gift tax exemption would be greatly reduced. Currently, the lifetime gift tax exemption is $11.7 million. With this new legislation, this exemption would decrease to $1 million, a 91% reduction. The annual $15,000 gift will still count toward the lifetime limit.

Is that all?

No. There was another bill introduced that you should keep an eye on, the Sensible Tax and Equity Promotion (STEP) Act. If passed, this bill eliminates the step-up in basis that a person receives when they inherit a property. Right now, when a beneficiary inherits a property, they receive a step-up in basis, which is essentially a readjustment of the value of the property to match the value at the time of the previous owner’s death for tax purposes. This helps to minimize the beneficiary’s capital gains tax.

However, the STEP Act changes this, and essentially removes this loophole for heirs who inherit property that has increased in value significantly and not been taxed. If a beneficiary inherits the property, they will now be taxed on those unrealized capital gains. There is, however, an allowance for the first $1 million in appreciated value, which will not be taxed.

What does this mean?

If the 99.5 Percent Act passes, the legislation will go into effect on or after December 31, 2021. It’s not clear whether there is enough support to pass the law, but if it passes it would mean significant changes to anyone with estates of more than $7 million. It’s important to understand how this legislation and the STEP Act could impact you, as you may still have time to plan accordingly.

For more estate tax advice and to begin developing a comprehensive estate plan for your family, please contact us for a complimentary consultation. We’ll help you navigate the difficult legal developments and make plans that protect your family’s legacy.