Bill Introduced in the Senate Would Reduce Estate Tax Exemption to $3.5 Million

According to a report from Forbes Magazine, U.S. Senate Budget Committee Chairman Bernie Sanders (D-Vermont) has introduced a tax reform bill that would, among other things, cut the individual estate tax exemption to $3.5 million. The legislation is co-sponsored by Jack Reed (D-Rhode Island), Kirsten Gillibrand (D-New York), and Chris Van Hollen (D-Maryland). A companion bill is also being introduced in the House of Representatives.

While this particular legislation still has to overcome many hurdles to become law, the general direction in our nation’s capital is clear: The estate tax exemption is likely to decrease within the next five years. If you are concerned about the impact of estate taxes, there are steps you can take now to protect your financial interests. Here, our North Carolina estate planning attorneys explain what you should know about the Senate bill and the future of the estate tax exemption in general.

The 18-page reform bill introduced by Senate Budget Chairman Bernie Sanders would change the federal estate tax in two key ways. First, the bill would cut the estate tax exemption by nearly 70%. As of 2021, the estate tax exemption is $11.7 million per individual and 23.4 million per married couple. If your estate is valued at less than that amount, then you are not subject to the estate tax. Under the proposed reform, the estate tax exemption would immediately fall to:

• $3.5 million per individual; and
• $7 million per married couple.

In other words, the bill is calling for a decrease in the exemption of approximately 70%. If enacted, the change would significantly expand the number of people and couples who have estate tax liability.

Beyond reducing the value of the exemption, the plan also calls for a higher estate tax rate. Under the current law, the federal estate tax rate is 40 percent. The bill would increase the baseline estate tax rate to 45%. In addition, it would create several new brackets with even higher estate tax rates. Under the legislation, the following new estate tax rates would be created:

• Assets above $10 million would be subject to a 50% estate tax rate;
• Assets above $50 million would be subject to a 55% estate tax rate; and
• Assets above $1 billion would be subject to a 65% estate tax rate.

A group of leading Senate Democrats are also pushing for a new capital gains tax on estates. Essentially, the bill would eliminate the current “step-up in basis” procedures and tax the unrealized capital gains of estate. The bill includes a $1 million capital gains exemption. An estate passing along more than $1 million in unrealized capital gains would lose out on its ability to step-up in basis and would be subject to a federal tax on all gains above the exemption level.

The Bernie Sanders estate tax plan is a long way from becoming law. At the same time, the estate tax exemption is already scheduled to decrease by nearly 50% in 2025. The additional room created by the 2017 Tax Cuts and Jobs Act (TCJA) is temporary. You can take action right now to maximize your estate tax exemption. Some options for estate tax planning include:

• Early gifting to preserve the full estate tax exemption;
• Preserving portability through spousal transfers;
• Taking advantage of certain protected expenditures (medical/education); and
• Setting up qualified trusts.

Of course, everyone’s estate planning needs are different. You should seek guidance and support from a North Carolina asset protection lawyer who understands your financial circumstances and your long-term objectives. A skilled asset protection attorney will help you put an estate plan in place that minimizes your total tax burden.

At Arnold & Smith, PLLC, our Charlotte estate planning lawyers have extensive experience advising clients on taxes and complex financial matters. If you have questions about estate tax exemptions, we can help. Contact our firm now for a fully confidential initial consultation. With legal offices in Charlotte, Monroe, and Mooreseville, we offer estate planning legal services throughout North Carolina, including in Mecklenburg County, Cleveland County, Rutherford County, Union County, Anson County, Rowan County, Cabarrus County, and Iredell County.