This article, part of our series on early 2021 tax proposals, examines two proposals to change the taxation of the transfer of wealth, and offers potential planning opportunities to consider before the proposals are enacted into law.

Each Congressional session sees a number of bills that would change the federal estate, gift and generation-skipping transfer (GST) taxes (sometimes herein collectively referred to as transfer taxes). Some of those proposals seek to increase transfer taxes and some seek to reduce or eliminate them.

The last major change to federal transfer taxes was made by the Tax Cuts and Jobs Act of 2017[1] (TCJA). Among other things, the TCJA increased the exclusions from the estate and gift tax and the GST exemption. The TCJA increased the amount of wealth an individual can transfer during one’s life or at death without the imposition of a transfer tax from $5.49 million in 2017 to $11.18 million in 2018 (effectively, $22.36 million for a married couple). In 2021, the exclusion amount as indexed for inflation is $11.7 million per person (effectively, $23.4 million for a married couple)[2] and is subject to further adjustment for inflation. 

With both houses of Congress and the presidency controlled by a single party, new priorities have come to Washington, D.C. Although we don’t know what will be enacted, we know that President Joseph Biden has proposed changes to many tax laws impacting individuals. With respect to transfer taxes, President Biden has proposed returning the estate tax to “historic norms.” There has been much written, both in the popular press and among tax and financial advisors, about returning the estate and gift tax exclusion and the (GST) tax exemption to 2009 levels,[3] along with an increase in the rates of those taxes. It seems that this position is based on a statement found on the Biden campaign website in which then-candidate Biden proposed paying to permanently provide family, medical and safe leave as well as sick and safe days “by returning the estate tax to 2009 levels.”[4] Additionally, the desire to bring the estate tax back to 2009 levels has been proposed previously, in the “For the 99.8 Percent Act”[5] proposed by Senator Bernie Sanders (I. Vt.) and the administration of President Barack Obama in its revenue proposals for the 2017 fiscal year[6] (colloquially known as the 2016 Green Book). 

The members of the 117th Congress have begun proposing (or preparing to propose) new legislation that would amend the Internal Revenue Code (IRC). Some of the legislation being discussed proposes increased transfer taxes on lifetime transfers, transfers on death and transfers in trust. This article will describe some of these proposals and suggest some planning ideas that you, along with your tax, legal and financial advisors, might consider undertaking now should the IRC be changed later this year. 

As with all legislative proposals, it is not certain what will ultimately be enacted or if any proposal will be enacted. This commentary, therefore, is speculative. As each person’s financial and tax situation is unique, before changing your plans based on proposed legislation, you should talk with your attorney, accountant and other tax and financial advisors. 

Senator Sanders has proposed new legislation increasing transfer taxes and limiting many of the estate planning techniques now used by wealthy individuals to transfer wealth at a reduced (or no) gift, estate or GST tax cost. 

The proposed bill, entitled “For the 99.5% Act”[7] (99.5% Act) is similar, but not identical, to the “For the 99.8% Act” proposed by Senator Sanders in the 116th Congress and contains many provisions similar to those proposed by the 2016 Green Book.

As President Biden campaigned on a promise to return the estate tax to historic norms, taxpayers should carefully consider these legislative proposals and act if warranted.

Q: How would the 99.5% Act change the estate, gift and GST tax rates, exclusions and exemptions?

The 99.5% Act proposes to reduce the estate tax exclusion to $3.5 million and the GST Exemption to the same amount. The 99.5% Act would reduce the gift tax exclusion to $1 million. These amounts would not be indexed for inflation.

The 99.5% Act would also increase the marginal estate, gift and GST tax rates as follows: to 45% (presently the top marginal rate is 40%) for taxable amounts greater than $3.5 million to $10 million; to 50% for taxable amounts greater than $10 million to $50 million; to 55% for taxable amounts greater than $50 million to $1 billion; and to 65% for taxable amounts greater than $1 billion.

The bill proposes that these provisions take effect for estates of decedents dying, and GST transfers and gifts made after December 31, 2021.

Planning Opportunity: If you are able, consider using your exclusion from the gift and estate tax now.

If you determine with the assistance of legal, tax and financial advisors that it is prudent to do so, perhaps consider making gifts to fully utilize your exclusion from the estate and gift tax.[8]

  • If you are married, consider using non-reciprocal spousal lifetime access trusts (SLATs).[9] A SLAT would allow you to create a trust for the benefit of your spouse (and possibly your descendants) using your exclusion from the gift and estate tax to shelter the gift to the SLAT from gift tax and on your spouse’s death, the estate tax.[10] Because your spouse is a potential beneficiary of the SLAT, assets can be distributed to your spouse and used by your family if they are needed. If the 99.5% Act is enacted, the value of certain grantor trusts would be subjected to the estate tax upon the deemed owner’s death and distributions from such trusts would be treated as a gift by the deemed owner for gift tax purposes (see discussion below). However, notwithstanding that a SLAT is a grantor trust,[11] it appears that the new grantor trust transfer tax rules proposed in the 99.5% Act would not apply to the amount of the original taxable gift to the trust. And, so long as the trust is fully funded before the date of enactment and no additions are made to the trust after the date of enactment, the effective date provisions with respect to 99.5% Act’s rules that would include the value of a grantor trust in the estate of a deceased “deemed owner”[12] (see discussion below) would prevent any of the value of such SLAT from being included in its creator’s gross estate and subjected to an estate tax when the creator died.
  • Consider also, or instead, using some or all of your exclusion from the estate and gift tax now to fund an irrevocable life insurance trust (ILIT). The funding amount should be enough to pay all future premiums for a life insurance policy to be owned by the ILIT. An ILIT created by and that holds a policy of insurance on the life of the insured is a grantor trust[13] and if the 99.5% Act is enacted could be subject to estate tax on the grantor’s death. However, the effective date rules (see discussion below) may prevent the value of that ILIT from being included in the grantor’s gross estate upon death.

Before engaging in any such planning, however, it is important to do the analysis. Notwithstanding that you could have a future estate tax, it is important not to make gifts to the extent that you risk negatively impacting your lifestyle and other goals, both today and after retirement. Also, if making transfers to a trust, it is critical not to deplete your estate to the extent that the transfers are fraudulent conveyances. As with any major financial decision, you should consult your tax, legal and financial advisors.

Q: Would there be limitations imposed on transfers of property that skip generations?

The 99.5% Act would limit the duration that a trust can be exempt from the GST tax. For trusts created after enactment, if the terms of the trust require it to terminate within 50 years of creation, it may be exempt from the GST tax (a qualifying trust) during the 50 years following its creation. Thereafter, it would be fully subject to the GST tax (being deemed to have an inclusion ratio of 1). If the terms of the trust created after enactment of the 99.5% Act do not require it to terminate within 50 years of its creation, it would be fully subject to the GST tax from creation (being deemed to have an inclusion ratio of 1).

With respect to trusts created before enactment of the 99.5% Act that are exempt from the GST tax,[14] for 50 years following enactment of the 99.5% Act, such trusts would be treated as qualifying trusts and would remain exempt from the GST tax. However, thereafter they will be fully subject to the GST tax (being deemed to have an inclusion ratio of 1).

Thus, a perpetual trust created after enactment of the 99.5% Act would have an inclusion ratio of 1 on its date of creation. 

If one trust transfers property to another trust, the date of creation would be deemed to be the earlier of the date the transferee or the transferor trust was created.

These provisions would take effect upon enactment of the 99.5% Act.

Planning Opportunity: Consider using your GST exemption now to create trusts that are exempt from the GST tax before enactment.

This provision would eliminate much of the dynastic trust planning that has been used for decades. The 99.5% Act would not change the structure of the GST, rather it would allow trusts to be exempt from the GST for a very limited time period.

Creating a trust before enactment and allocating GST exemption to the transfer funding the trust would allow the trust to be free from the GST tax for 50 years following enactment of the 99.5% Act. If you are able to do so, you may wish to fully utilize your remaining GST exemption to create a trust having an inclusion ratio of zero (a trust not subject to the GST tax) that can make distributions to skip persons until it ceases to be a qualifying trust 50 years after enactment.

If you are not able to fully fund a GST exempt trust before enactment, when drafting new trusts be sure to build flexibility into the structure of the trust. For example, consider incorporating into the trust the role of a “trust protector” who can confer upon the beneficiary a general power of appointment. In this way, the trust protector can determine whether to cause the trust to be included in the beneficiary’s gross estate, thereby allowing the trust to be subject to an estate tax rather than a GST. By doing this the estate tax attributable to the trust can be offset by the beneficiary’s exclusion from the estate tax and then take advantage of the lower estate tax marginal rates for taxable amounts below $1 billion.

If you already have created a GST exempt trust, consider modifying that trust before enactment of the 99.5% Act to add a trust protector with the power described above.

Q: Would there be new items subject to transfer taxes?

For the last few decades, taxpayers have used grantor trusts combined with other wealth transfer techniques to transfer wealth to their descendants. Under the grantor trust rules, the creator of a trust or some other person is treated as owning the assets of the trust for federal income tax purposes, even if not considered the owner for property law (or estate tax) purposes.[15] The “grantor or another person includes in computing his taxable income and credits those items of income, deduction, and credit against tax which are attributable to or included in any portion of a trust of which he is treated as the owner.”[16] Taxpayers have used grantor trusts as a mechanism to sell assets to a trust without imposition of an income tax.[17] Using the law as it is today, in one common transaction known as a sale to an intentionally defective grantor trust (IDGT), a taxpayer sells assets to the IDGT in exchange for a promissory note. The value of the assets sold plus interest at the applicable federal rate (AFR) are returned to the taxpayer over the term of the note. The sale does not result in a capital gain subject to income tax, nor does the payment of interest to the taxpayer result in ordinary income tax. Additionally, the payment of the income tax attributable to the IDGT’s assets is like an additional gift to the trust’s beneficiaries with no gift tax consequences to the grantor.[18] Although the IDGT is a grantor trust, the trust assets are excluded from the grantor’s gross estate and not subject to estate tax. 

Therefore, after the note is paid, all appreciation on the property transferred to the trust over the interest rate charged on the promissory note is left in the IDGT, having been transferred there (after the initial gift to the trust) without consuming any gift tax exclusion or requiring any gift tax payment. 

The 99.5% Act takes aim at these transactions (and others that rely on grantor trust status).

The 99.5% Act, if enacted, would subject the value of a portion of the assets in certain grantor trusts treated as owned by a deemed owner to estate tax on the death of the deemed owner. Additionally the 99.5% Act would treat as a transfer by the deemed owner for gift tax purposes (i) any assets distributed to one or more beneficiaries during the deemed owner’s life and (ii) the assets of a grantor trust if the deemed owner ceases to be treated as the owner of the trust for purposes of the grantor trust rules. These rules would apply to any portion of a trust (I) for which the grantor of the trust is the deemed owner and (II) the portion of a trust for which a person other than the grantor is the deemed owner under the grantor trust rules[19] and such other person (the deemed owner) engages in a sale or exchange or similar transaction with the trust which is disregarded for purposes of the imposition of the federal income tax. 

The bill contains, provisions to prevent double taxation. If the deemed owner were to make a gift to the trust that is a taxable gift, that portion of the trust would not be subject to the gift or estate tax by virtue of this new rule. The portion of the trust attributable to income and appreciation on the trust’s assets would, nevertheless, remain subject to these rules.

These provisions would apply to (i) trusts created after enactment of the 99.5% Act, (ii) any portion of a trust created before enactment which is attributable to an addition after enactment or (iii) any portion of a trust established before enactment to which a person other than the grantor is deemed the owner and such other person (the deemed owner) engages in a sale or exchange or similar transaction with the trust which is disregarded for purposes of the imposition of the federal income tax.

Planning Opportunity: Complete sale transactions with grantor trusts as soon as possible.

Based upon the effective date of these proposed rules, if you are the deemed owner of a grantor trust and considering selling assets to the trust, you should do so before enactment of the 99.5% Act. However, after enactment, no additions should be made to the trust. Additionally, if you think you may purchase life insurance in the future, consider creating an ILIT now with minimal funding that can purchase life insurance at some future date. Although additions of assets to the ILIT after the enactment date would trigger these rules, the ILIT could instead borrow (using a split-dollar program)[20] to fund a life insurance policy purchased after enactment.

Q: Would there be other restrictions on grantor trusts?

Assets held in grantor trusts that are not included in the gross estate of the decedent would not receive a so-called step-up in basis upon the grantor’s death. This is likely an attempt to prevent planning practitioners from taking the position that appreciated assets in a grantor trust receive a step-up in basis.

Q: Would other transfer tax saving strategies be limited?

The terms of the 99.5% Act would limit how a grantor retained annuity trust (GRAT) can be constructed, to such an extent that the GRAT may no longer be a viable wealth transfer technique.

A GRAT is a special type of trust which can allow you to transfer to your beneficiaries, with little or no gift and estate tax cost (whether through use of exclusion or payment of a tax liability), that portion of the appreciation on the value of the assets contributed to the trust in excess of an assumed growth rate required by the IRC (for ease of reference, the IRC rate).[21] Under current law, to create a GRAT, you would transfer assets to the GRAT and retain the right to receive a series of annuity payments from the GRAT for a specified term of years. For gift tax purposes, the amount of the gift would be the fair market value of the assets transferred to the GRAT less the actuarial present value of your annuity interest. If the GRAT provides for sufficiently high annuity payments (and/or a sufficiently long annuity term), then the present value of your annuity interest can approximate the fair market value of the assets transferred to the GRAT, in which case the gift tax cost will be minimized or potentially eliminated. This is known as “zeroing-out” a GRAT. The IRS assumes that the assets contributed to the GRAT will produce a total return equal to the IRC rate over the term of the annuity. As a result, if the actual total return earned by the GRAT’s assets during the annuity term exceeds the IRC rate, the IRS will have undervalued the gift. The amount of the undervaluation (that is, the total return realized by the GRAT’s assets in excess of the IRC rate) will pass to your beneficiaries at the end of the annuity term free from gift tax cost.

To achieve this special treatment, the annuity retained by the grantor must be a qualified annuity interest.[22] If the annuity retained by the grantor is not a qualified interest, then the value of the retained annuity for gift tax purposes will be zero, and the full value of the amount transferred to the trust will be treated as a gift subject to the gift tax.[23] Thus, if the grantor’s retained annuity is not a qualified interest the gift tax result to the grantor is the exact opposite of a zeroed-out GRAT; the full value of the amount transferred to the GRAT will be treated as a gift.

The 99.5% Act would change what is a qualified interest when that interest is retained by the grantor of a trust, such as a GRAT. Under the new rules, a qualified annuity retained by the grantor must have:

(a) a minimum term of 10 years,

(b) a maximum term of not more than the life expectancy of the annuitant plus 10 years,

(c) the fixed amounts retained by the grantor may not decrease during the annuity term,

(d) and the actuarial value of the remainder interest at the time of the transfer must be: (i) not less than the greater of 25% of the fair market value of the property in the trust or $500,000, or

(ii) not greater than the fair market value of the property transferred to the trust.

Essentially, if the 99.5% Act is enacted, the portion of the trust that is a taxable gift may not be less than $500,000 (unless the total value of the trust is less than that amount).

Consider the impact of the reduced exclusion amounts proposed by the 99.5% Act. If the exclusion from the gift tax were to be reduced to $1 million, the creation of a single GRAT with at least $500,000 in property would consume one-half of that exemption. Additionally, the value of at least a portion of the GRAT would be included in the grantor’s estate should the grantor die while owning the retained annuity.[24] By requiring a 10-year term for the grantor’s retained annuity, the 99.5% Act increases the chance that the grantor will die during the term of the annuity, causing at least some of the value of the GRAT to be included in the grantor’s gross estate and subjected to estate tax.

The changes to the GRAT rules would apply to transfers made after enactment.

Planning Opportunity: As this may be the last opportunity to use zeroed-out GRATs as a wealth transfer technique, consider creating GRATs before enactment.

The GRAT strategy as currently used may no longer be viable following enactment of the 99.5% Act. Now may be the time to create one last set of GRATs. Using a series of laddered GRATs (for example, a series of GRATs with different annuity terms, such as two, three, four, five and six years) may allow you to reduce mortality risk while taking advantage of the GRAT strategy to capture and transfer asset appreciation over many years.

Additionally, consider dividing asset classes among multiple GRATs. GRATs that own a single asset (or asset class) can be more efficient than GRATs that own a blended portfolio. 

If a GRAT owns a diversified portfolio, during the annuity term the poor returns of underperforming assets will offset the good returns of overperforming assets, thereby dragging down the overall performance of the GRAT and reducing the amount that can pass tax-efficiently to your beneficiaries at the end of the annuity term. 

Alternatively, if each of a series of GRATs owns a single asset (or asset class), those GRATs that own assets that overperform will, generally, produce more value to the beneficiaries at the end of the annuity term, while those GRATs that own assets that underperform (for instance, appreciating at a rate less than the IRC rate or even having negative returns) over the course of the term will return their assets to you. Although the underperforming GRATs will leave nothing to your beneficiaries at the end of their annuity terms, they will not have diminished the performance of the overperforming GRATs.

Q: Would my ability to make gifts be limited?

The 99.5% Act would limit a taxpayer’s ability to make annual exclusion gifts of certain types of property and to certain entities. Presently, a donor may give a relatively “small” amount to each beneficiary of their choosing before facing the federal gift tax. This amount is known as the annual exclusion amount, which for 2021 is $15,000 per beneficiary. Not all gifts qualify for the annual exclusion. Under current law, a gift must be of a “present interest in property” to qualify for this exclusion from the gift tax. These are gifts that the beneficiary can access and use immediately.

Under the new rules, a donor would continue to be able to give any number of outright gifts of cash and marketable securities to any number of donees up to the annual exclusion amount and have those gifts excluded from the donor’s gifts for the year. The donor, however, would only be able to give up to twice the annual exclusion amount with respect to “transfers subject to limitation.” Transfers subject to the annual exclusion limitation would be:

(i) transfers in trust,

(ii) a transfer of an interest in a pass-through entity,

(iii) a transfer of an interest subject to a prohibition on sale,[25]

(iv) any other transfer of property that, without considering put or other such rights cannot be immediately liquidated by the recipient.

Additionally, to conform to the new rules, the ability to make gifts to so-called “minor’s trusts” would be eliminated.

Many grandparents fund individual trusts for each of their grandchildren that qualify for the gift tax annual exclusion and the GST tax annual exclusion.[26] For instance, a grandparent could fund as many trusts using these annual exclusion provisions as the grandparent has grandchildren. This provision would limit the amount that could be transferred to such trusts to twice the annual exclusion amount.

These provisions with respect to the annual exclusion would take effect after enactment.

Planning Opportunity: If you traditionally make annual exclusion gifts to trusts at the end of the year, consider funding those gifts now.


Q: Are there other provisions that would impact my ability to transfer property?

The 99.5% Act would limit the ability to use so-called “valuation discounts” when determining the value of property transferred for gift and estate tax purposes.

If an interest in an entity that is not publicly traded is transferred, non-business assets would not be included in the entity’s value and would be treated as if transferred directly by the transferor, without any allowance for valuation discount. Non-business assets are those not used in at least one or more trades or businesses. A passive asset would not be treated as used in an active trade or business unless the asset is: 

(1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;

(2) property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in [IRC §] 167, or real property used in his trade or business;

(3) a patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical or artistic composition, a letter or memorandum or similar property, held by 

(A) a taxpayer whose personal efforts created such property,

(B) in the case of a letter, memorandum or similar property, a taxpayer for whom such property was prepared or produced, or

(C) a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B); [or]

(4) accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or from the sale of property described in paragraph (1).

Also, a passive asset would not include real property used in the active conduct of a real property trade or business[27] provided that the transferor materially participates in such trade or business by meeting the requirements of the IRC by performing more than 750 hours of services during the taxable year in the real property trades or businesses in which the taxpayer materially participates.[28]

The 99.5% Act provides a list of those types of assets that are passive assets. However, passive assets that are held to meet the reasonably required working capital needs of the business would be treated as being used in an active trade or business.

If an entity (top level entity) owns a non-business asset consisting of a 10% interest in any other entity (lower level entity), the lower level entity would be disregarded and the top level entity would be treated as directly owning a proportionate share of the assets of the lower level entity. This look-through provision would carry through all business entity tiers, following similar rules.

Also, with respect to the transfer of an interest in an entity other than an interest which is actively traded,[29] no discount would be allowed by reason of the fact that the transferee does not have control of such entity, or by reason of the lack of marketability of the interest, if the transferor, the transferee, and members of the family of the transferor and transferee have control of such entity, or own the majority of the ownership interests (by value) in such entity. For these purposes a member of the family is an ancestor of such individual, the spouse of such individual, a lineal descendant of such individual, of such individual’s spouse, or of a parent of such individual, or the spouse of any lineal descendant of such individual, of such individual’s spouse, or of a parent of such individual.

These rules would take effect after date of enactment.

Planning Opportunity: Transfer closely held entities now to take advantage of valuation discounts.

If you are contemplating transferring interests in your closely held business, you may wish to do this now before these provisions are enacted. You may need to move quickly to take advantage of any currently applicable valuation discounts should you desire to transfer an interest in your business with optimal tax efficiency.

Q: Are there other changes being considered?

There is another set of bills being considered by members of Congress that would introduce a new capital gains tax when property is gratuitously transferred. Senator Van Hollen intends to introduce into the Senate the Sensible Taxation and Equity Promotion Act of 2021[30] (STEP Act). A similar, though not identical, bill has been introduced in the House of Representatives by Congressman Bill Pascrell (D. N.J.). This article reviews the STEP Act as a proxy for both bills.

Q: How would a capital gains tax on a transfer by gift or at death work?

Under the STEP Act, any property which is transferred by gift, in trust or at death would be treated as sold for its fair market value to the transferee on the date of the transfer.

Special rules apply to property held in trust.

  • With respect to property transferred to a grantor trust:
    • if immediately following the transfer to the trust, the property in the trust would be included in the transferor’s gross estate, the deemed sale on transfer rules would not apply. Instead, with respect to such property, a sale would be deemed to occur on the date that (i) the deemed owner of the trust’s assets ceased to be treated as their owner (that is, the trust is no longer a grantor trust), (ii) property is distributed from the trust to someone other than the deemed owner, or (iii) the trust property would no longer be included in the grantor’s gross estate and subjected to the federal estate tax, or on the transferor’s death.
    • if immediately following the transfer to the trust, the property in the trust would not be included in the transferor’s gross estate, the property transferred to the trust would be treated as sold to the trust for it’s fair market value on transfer.
  • With respect to property transferred to a non-grantor trust: All property owned by the trust would be treated as sold for its fair market value on the last day of the taxable year ending 21 years after the latest of (i) December 31, 2005, (ii) the date the trust was established or (iii) the last date on which such property was deemed to have been sold by these rules. The basis of the assets in the trust will be adjusted to take account of any gain or loss subsequently realized pursuant to a deemed sale under these rules.

Q: The current federal estate tax has an exclusion amount and exceptions (such as for property passing at death to a surviving spouse). Would the new capital gains tax on deemed realization events have any exclusions or exceptions?

There would be several excluded transactions and exceptions to the general rules.

  • Each individual may transfer on death up to $1,000,000 of property without recognizing gain. The individual may transfer up to $100,000 of property during life without application of this tax. The $1,000,000 exclusion for transfers of property at death shall be reduced by the amount of property (up to $100,000) excluded from this tax during life. The exclusion amounts are indexed for inflation but are rounded down to the next lowest multiple of $10,000. Therefore, the exclusion amounts would increase only when inflation increases them by $10,000.
  • Transfers of tangible personal property other than a collectible item[31] that are not held in connection with a trade or business or used for the production of income would be excluded from this tax.
  • Transfers to a spouse, surviving spouse or transfers to a trust that confers a life estate with a general power of appointment on the spouse or surviving spouse,[32] or a transfer of qualified terminable interest property would be excluded from this tax. Importantly, the exception to the new tax is disallowed if property passes to a spouse or surviving spouse who is not a citizen or long-term resident of the United States.
  • Transfers to or for the use of charitable organizations described in IRC § 170(c) and amounts that are transferred to a trust for the use of such organizations also would be excluded from the tax. The special valuation rules of IRC Chapter 14 apply when valuing split interests in trust. The exception would not apply to the value of any interest in a trust unless that interest is a qualified annuity or a unitrust interest.
  • Transfers to a qualified disability trust or a cemetery perpetual care fund would also not trigger a tax on transfer.

Q: What would happen if a deemed transfer results in a capital loss?

Losses from transfers made during life (but not made at death) to a related party would be disallowed.[33]

Q: What would happen to my basis if assets are deemed sold on transfer?

The STEP Act adjusts the basis to reflect the recognition of capital gain on the transfer of property. Carry over basis would be eliminated except with respect to gifts to spouses and charitable organizations. Therefore, the transferee’s basis would be adjusted to match the value that was taxed at the time of the transfer.

Q: Would the capital gains tax following a transfer have to be paid all at once?

With respect to deemed transfers of assets that are not publicly traded (an eligible asset)[34] caused by the death of a taxpayer or the mark to market every 21st year[35] of the assets in a non-grantor trust, the taxpayer may elect to defer payment of such tax. Rules similar to those applicable to the installment payment of deferred of estate tax[36] would apply to the installment payment of deferred tax on deemed transfers. The deferred tax may be accelerated with respect to any portion of an eligible asset that is distributed, sold, exchanged, or otherwise disposed of or that is used to secure (in whole or in part) non-recourse debt. Additionally, failure to make certain payments would also accelerate the deferred tax. A lien on the eligible property may be required. Similar to the rules pertaining to deferred estate tax, a decedent’s estate would not receive an estate tax deduction for interest paid on such deferred tax.

Q: When does the STEP Act take effect?

If enacted as written, the STEP Act will apply to transfers made after December 31, 2020, and made in tax years beginning after December 31, 2020. For most individual taxpayers, the tax would be retroactive and apply to transfers made in 2021.