I usually do not write about pending legislation because the language in bills can change at lightning speed.
This year is different. The proposed changes are so drastic and impactful on estate planning and probate that you need to know what is out there. The top four areas to watch are the federal estate and gift tax exemption, portability, stepped-up basis and the Rule Against Perpetuities.
As with any proposed legislation, you need to look past the initial press release and focus on the substance and impact. Let us begin with the U.S. Congress, which is off to a roaring start on spending and tax legislation.
Right out of the gate is the proposed legislation named the Sensible Taxation and Equity Promotion (STEP) Act, which is sponsored by Senators Chris Van Hollen, Cory Booker, Bernie Sanders, Sheldon Whitehouse and Elizabeth Warren. To understand the change, you must look at the existing state of affairs. Under current law, when someone dies, the beneficiaries of his or her estate take their inheritance at a stepped-up basis. No capital gains are realized and no taxes on capital gains are due.
The proposed STEP Act abolishes that. Death would now be treated as causing a sale of property at fair market value, and taxes would be immediately due on any capital gains.
The same would apply to gifts; they would be treated as a sale on the date of the gift, and capital gains would be due.
As for grantor trusts, the death of the grantor would be treated as causing a sale of property within the trust. Again, capital gains would be due.
For nongrantor trusts, every 21 years the property held within the trust would be “deemed” sold and taxes would be due on the unrealized gain.
There is an exclusion – an “individual” may get a $1 million exclusion from taxation for unrealized gains at death (presumably his own). And, helpfully, the tax can be paid out over 15 years if the inherited item is not sold.
An unpublicized side effect: Every estate and trust will have to file a tax return for capital gains.
An explanation and summary of the STEP Act can be found on Sen. Van Hollen’s website.
On the state side, Rep. Eddie Lucio III has filed a bill to extend the Texas’ Rule Against Perpetuities from 21 years to 300 years. To explain this, we need to get into the weeds. The Rule Against Perpetuities requires that trusts cannot be made for perpetuity – an interest must “vest” not later than 21 years after some life in being at the time of the creation of the interest, plus a period of gestation.
Confusing, yes? The lawyers think so, too: The Rule Against Perpetuities is a favorite on law exams.
Most states have either repealed the Rule Against Perpetuities or extended the relevant period. Texas, however, has been reluctant to make that change.
As a result, you cannot create a true dynasty trust under Texas law. You must go to another state to make it effective. That puts Texas at a disadvantage for long-term estate planning.
The proposed change would mean real money to the state. One study found that states with no RAP statue increased their average reported trust assets by $6 billion. In revenue numbers, that would mean an additional $60 million from trust management fees would stay in Texas.
If you have an opinion on either bill, now would be a good time to make it known.
This article originally appeared on Dallas News.
