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While the country is holding its breath to see if we'll be dealing with a second government shut down, two completely opposite estate tax bills have been introduced in the Senate.
On January 31, 2019, Senator Bernie Sanders introduced the For the 99.8 Percent Act (S. 309) “to amend the Internal Revenue Code of 1986 to reinstate estate and generation-skipping taxes, and for other purposes.”
In case you were wondering if the estate tax and generation-skipping transfer tax or generation-skipping tax (GST tax) are alive and well despite the listed purpose of this bill - the answer is yes. The imposition of these taxes is not as frequent as it was prior to the Tax Cuts and Jobs Act of 2017 (the major tax reform bill that passed at the end of 2017). This law doubled the prior estate tax exemption starting in 2018. Today the estate tax and GST exemption is $11,400,000 per person ($22,800,000 per couple) and this amount increases with a COLA. Unfortunately, this provision doubling the estate and GST exemption is scheduled to expire on December 31, 2025.
Here are some of the major provisions of S. 309:
- The current estate tax exemption and GST exemption of $11,400,000 per person would be reduced to $3,500,000 - according to the summary for this bill only 0.2% of Americans have estates over $3.5 million. While this percentage appears low, we do know that when the estate tax exemption was at the $3,500,000 level, many small businesses were subject to the tax and had to take steps to mitigate its impact.
- Today, federal estate taxes are imposed at a flat 40% estate tax rate on the portion of an estate in excess of the estate tax exemption amount. S. 309 would change the 40% estate tax rate to a progressive estate tax structure –
- 45% on the value of an estate between $3.5 million and $10 million
- 50% on the value of an estate between $10 million and $50 million
- 55% on the value of an estate in excess of $50 million
- 77% on the value of an estate in excess of $1 billion.
The SBLC has advocated for many years that a progressive estate tax structure makes sense - but we have advocated a far different rate structure. The SBLC has suggested that it would be more fair to tax the first $5 – 10 million over the estate tax exemption at a 20% rate and that the 40% estate tax rate should apply only to the value of the estate over that amount. We contend that this type of lower estate tax rate on the smallest taxable estates would assist in job creation and increased profitability for small businesses. So, while the SBLC agrees with the idea of progressivity, we support a reduction in the current 40% tax rate, not an increase in the estate tax rate and thresholds.
It is understood by many policy makers that, in the past, the estate tax has hit small and family owned businesses extremely hard - sometimes causing a huge cash drain to an ongoing small or family owned business just at the time the business is struggling to be successfully passed on to the next generation of owners. Often at this time suppliers, lenders, etc. take a wait and see approach to determine if the company can successfully transition to new ownership/leadership. The last thing this business needs is a huge cash drain flowing from the business to the federal government. Companies that were aware of the estate tax burden were required to spend dollars that could have been invested in the business or paid to the employees, to pay advisors and insurance companies in order to be able to mitigate the impact of the estate tax. There is no question that the increased federal estate tax exemption included in the recent tax bill provided significant relief to many small businesses and family owned businesses. The SBLC strongly supports making this important provision permanent so that it extends beyond 2025.
S. 309 would also limit a number of time-honored estate planning techniques which help small and family owned businesses reduce their overall estate taxes. Recently, the IRS through regulations attempted to limit valuation discounts on gifts of interests in a family business made from senior family members to younger family members. If these regulations had become law, they would have made it much harder for older generations to successfully transition ownership of a family owned business during their lifetime to a younger generation. The SBLC, along with many other small business groups, successfully beat back these regulations. S. 309 would once again attack these discounts making it much harder for the parents to gift interests in a family enterprise to their children or other younger employees.
In the summary to the bill is a chart setting forth how the 588 billionaires in the country, who the summary claims have a combined net worth of over $3 trillion, would owe up to $2.2 trillion in estate taxes if S. 309 became law. The chart names each billionaire, lists their net worth and how much they would have to pay in estate taxes under S. 309.
An example of the dramatic impact S. 309 could have on a small business owner is the following:
Assume the small business owner is single and has a taxable estate equal to $11,400,000. If this owner passed away in 2019, no estate tax would be owed on his estate. If the current law is not made permanent and this owner with the same level of assets were to pass away in 2026, then approximately $5,600,000 of assets would be subject to estate taxes at a 40% tax rate or roughly $2,240,000 of estate taxes would have to be paid to the federal government. [For those of you interested in the details, we don't know what the $5,000,000 with the annual COLA adjustment would be equal to in 2026 because the COLA cannot be calculated in advance – thus it is not possible to determine what the federal estate tax and GST exemption will be when the provision expires. For instance, the estate tax exemption in 2018 was $11,180,000 and due to the COLA was raised to $11,400,000 for 2019. Each year it will increase based on the COLA.] Now assume that S. 309 became law – this same estate would now be hit with a federal estate tax bill of roughly $3,625,000! These are huge dollars to an estate of a size frequently seen in the small business world, particularly with respect to owners of businesses that are capital intensive. To summarize:
Single small business owner passes away with $11,400,000 estate in 2019: federal estate tax due $0
Same owner – same estate- owner passes away in 2026: federal estate tax due ~ $2,240,000
Same owner – same estate- owner passes away when S. 309 is law: federal estate tax due ~ $3,625,000
At this time S.309 has only one cosponsor, Senator Kirsten Gillibrand (D-NY), and it has no chance of being passed into law in the near future. However, if the Democrats take control of the House, Senate and White House in 2020, absent a major outcry from small and family owned businesses that drives push back from more moderate members of the party, look to see a reduction in the estate tax and GST tax exemption amount and higher estate tax rates. While it seems doubtful that the reduction in the estate tax and GST exemption would be as harsh as that set forth in this bill, it is certainly possible that the exemption amount would revert back to the pre-2017 Tax Cuts and Jobs Act level of $5,000,000 plus COLA per person.
Meanwhile, on January 24, 2019, the Republican leadership in the Senate introduced the Death Tax Repeal Act of 2019 (S. 215) to repeal estate taxes outright. This seven page bill would repeal federal estate and GST taxes, but would retain a gift tax on major gifts. This legislation would not affect the step-up in basis that assets receive when they go through an estate. This is a relief as some prior proposals have sought to trade an elimination of the estate tax for an elimination of the step-up in basis. The SBLC is on record as strongly opposing any proposal which would reduce or eliminate the step-up in basis on assets going through an estate. As we have discussed in our prior alerts, such an elimination of the step-up would trigger a massive capital gains tax on all income groups throughout the country and hit far more taxpayers than the estate tax. This bill currently has 28 co-sponsors – all Republicans. Similar to S. 309, this bill is unlikely to become law any time soon.
Even though neither bill is likely to become law, many small business owners who have assets below or at the current federal estate tax exemption ($11,400,000 per individual, $22,800,000 for a couple) but above the exemption if the doubled provision is not extended and allowed to expire (approximately $5,800,000 per individual, 11,600,000 per couple, in 2026) may want to consult with advisors to determine if there are ways to preserve the higher estate tax and GST tax exemption today. Even though many tax practitioners believe that their clients will have until at least the end of 2025 to take steps to preserve the higher exemption amount, this may not be the case if the country elects a Democratic majority in the Senate and House and a Democrat for President in 2020. In short, owners may want to be taking steps this year to preserve the benefits of the higher estate tax exemption amount if the tea leaves look for a takeover by the Democrats in 2020.
2019 Legislative meetings
April 23, 2019 - ICBA offices – 1615 L Street, NW, Suite 900
June 4, 2019 - ICBA offices – 1615 L Street, NW, Suite 900
August 15, 2019 – Conference Call
October 1, 2019 - ICBA offices – 1615 L Street, NW, Suite 900
All meetings run from 10:00 AM to 12:00 noon
Errata: In our summary of the recent Annual Meeting we listed Nancy Cueroni as the Executive Director of the Outdoor Power Equipment Aftermarket Association rather than the Outdoor Power Equipment and Engine Service Association (OPEESA). We apologize for this error.