Senator Bernie Sanders has introduced in the Senate what he calls the “99.5% Act” (the “Act”). For individuals dying and gifts made after December 31, 2021, the Act would substantially increase the federal estate tax by reducing the federal estate tax exemption from $11,700,000 to $3,500,000 per person and increase the estate and gift tax rates from a maximum rate of 40%, to 45% on estates between $3.5 million and $10 million with further rate increases topping out at 65% for estates in excess of $1 billion. The gift tax exemption is reduced to $1,000,000 beginning in 2022.

Under the Act the taxable estate of the creator of a “grantor trust” (a trust on which the creator/grantor of the trust is required to pay the trust’s income tax liability so the trust can grow income tax-free), would include the value of the trust at the time of the grantor’s death minus the value of the gift when the trust is created. This means in effect that the appreciation on a grantor trust is added to the grantor’s taxable estate. This change applies to grantor trusts created after the date of enactment of the Act and to post-Act contributions to existing trusts. Also, with regard to grantor trusts, the Act would eliminate the step-up in basis for assets re-acquired by the grantor under the so-called “swap” provisions of grantor trusts. All of these changes substantially reduce the benefit of grantor trusts, which have become a widely-used estate tax reduction vehicle...