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Bernie Sanders Copyright Chip Somodevilla, Getty Images

How Bernie Sanders' 99.5% Act Could Affect Estate Planning and Life Insurance

The act proposes some tectonic shifts that would greatly impact high-net-worth clients.

There’s a proposal currently making its way through the halls of Washington that would dramatically affect estate planning. It’s critical that advisors understand how it might impact their clients.

The 99.5% Act, championed by Bernie Sanders, proposes some tectonic shifts to the way estate planning has been done for a long time. We’ve been working under the Tax Cuts and Jobs Act of 2017 for four years now; and this new act aims specifically at some of the provisions reflected in the TCJA. 

Here are four of the key areas advisors need to be aware of during estate planning discussions with clients.

Annual Gift Exclusion Reduced 

The annual gift tax exclusion is currently $15,000 per beneficiary per year.

So, if someone wants to give a monetary gift to 10 grandchildren, they could give $150,000, in 10 separate lots of $15,000, and still not dig into their lifetime gift and estate tax exemption. A married couple in that situation could give $300,000 before hitting their exemptions, because the annual exclusion applies per donor. 

The 99.5% Act proposes to reduce the annual gift tax exclusion from $15,000 per year per beneficiary to $20,000 as an annual total for all gifts and $10,000 per beneficiary. In addition, the lifetime gift tax exemption would be limited to $1 million total per donor.

Lifetime Gift and Estate Tax Exemption Reduced 

The act proposes to reduce the lifetime exemption to $1 million for gifts and $3.5 million of total transfer tax exemptions, meaning your clients could gift away $1 million during their lifetime and pass on an additional $2.5 million when they die before being affected by estate taxes. 

This is one of the more drastic measures; currently the combined gift and estate tax exemption is $11.7 million. The TCJA raised this number dramatically in 2017, up from $5 million, and this new act would undo that jump and then some. The TCJA increased exemption is due to sunset after 2025 and return to approximately $6 million per person—still a more generous exemption than the proposed $3.5 million.

Life Insurance 

Life insurance could also be deeply affected by this bill. One of the strategies used by high-net-worth investors is to have a policy owned by an ILIT (irrevocable life Insurance trust)

This strategy helps with tax efficiency, especially if the death benefits are particularly high. If a life insurance policy is owned by an irrevocable trust for at least three years, it is not considered part of the deceased’s gross estate, reducing the decedent’s exposure to transfer taxes.

During the investor’s lifetime, the life insurance premiums paid on the policy are considered gifts to the trust and are often simply counted against the $15,000 annual tax exclusion. When the death benefit comes into play, the policy proceeds are protected from the IRS because the policy is in an irrevocable trust. 

The 99.5% Act not only raises annual gift tax issues when the annual policy premiums are high, it also puts those funds back into the overall estate, so when the policy proceeds are transferred at the time of the grantor’s death the cut taken by estate taxes could be dramatic. This means anything over the $3.5 million exemption will be taxed at the new progressive tax rates starting at 45% and increasing as high as 65%. 

Dynasty Trusts 

Multigenerational dynasty trusts created before the date of enactment will not be included in the gross estate, but if the new act passes, it will force them to “expire” for tax protection purposes in 50 years. That expiration would create a taxable event.

So, the estate planning work you’ve done in the past won’t be affected right away, but eventually those currently protected dollars would be touched.

What to Do?

Although the exact implications of the act are uncertain, or even if the act will make it through Washington, what advisors should do now with their clients is take action.

If you have a client with life insurance not in an irrevocable trust, it needs to be. Even if the act passes, trusts put together before the date of will not be as strongly affected, so now is the time to get these plans put into place. Establishing a trust has its own stress and expense, but the benefits are obvious in this case. 

Another recommendation that may fit for clients is to overfund these trusts with cash or marketable securities now to avoid the low ceiling on annual gift tax exclusions in the future. It’s all a matter of timing; an annual “gift” of premiums to these trusts could be affected substantially. 

Whether or not this act becomes law, we all know that change is a constant in wealth management. There will be other proposals in the future. The advisors who are best positioned to succeed are those who educate themselves, get out in front of proposed changes and take care of their clients before the need becomes urgent.

Andrew Altfest CFP, MBA is president and principal advisor at Altfest Personal Wealth Management, a $1.7 billion RIA based in New York City. He is also the founder and CEO of FP Alpha.

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