As estate planning attorneys, we must stay ahead of legislative changes that can significantly impact our clients' strategies. The American Housing and Economic Mobility Act of 2024 (HR 9245), sponsored by U.S. Senator Elizabeth Warren (D. Mass.), signals a transformative shift in both the housing policy and tax landscape. These changes will have profound implications for estate planning, charitable giving, and the financial strategies used by high net worth individuals. Although we probably won't know if this legislation has a chance of becoming law until after the November 5th election, it's good to know what kinds of changes are being considered.

The act aims to strengthen affordable housing through significant federal investment. This legislation is not just a housing initiative; it also serves as a vehicle for substantial tax reform to address income inequality and ensure that wealthier individuals and corporations contribute more equally to society's needs.

These reforms present challenges and opportunities for estate planning professionals to reevaluate and optimize our clients' estate plans.

Main legislative changes

1. Reduction of estate and gift tax exemptions. The act proposes a dramatic reduction in federal estate and gift tax exemptions, lowering them from $12.92 million per individual to roughly $3.5 million. This reduction would expand the number of estates subject to federal estate taxes, increasing the need for careful planning. The proposed progressive estate tax rates – 55% on amounts up to $12.92 million, 60% on amounts between $12.92 million and $93 million, and 65% on amounts exceeding $93 million – would require us to revise the structures of our clients' assets to ensure tax efficiency and compliance.
2. Introducing a wealth tax. The introduction of a wealth tax targets individuals with net assets exceeding $50 million. Tax rates start at 2% for assets between $50 million and $1 billion and escalate to 6% for those with assets over $1 billion. For clients in this group, it is essential to explore strategies that mitigate the impact of this new tax, such as using lifetime gifts, charitable contributions and trusts.
3. Changes in the treatment of capital gains tax. The act proposes that capital gains for individuals earning over $1 million a year be taxed as ordinary income. This change could significantly increase the capital gains tax rate for wealthy individuals, especially those in the highest marginal income tax bracket. Estate planning strategies should consider how to manage these potential increases, perhaps through the timing of asset sales or the use of tax-advantaged investment vehicles.
4. Imposition of the tax on financial transactions. A new FTT for trading stocks, bonds and derivatives aims to curb market speculation while generating revenue to support affordable housing initiatives. Although the tax is relatively small, it will add up for clients with significant trading activity, requiring a review of investment strategies and possible alternatives that minimize exposure to this tax.
5. Increase in corporate tax. The law also seeks to raise corporate tax rates, particularly for large corporations, potentially affecting clients with significant business interests. These clients may need to adjust their business structures or explore alternative strategies to maintain tax efficiency while complying with the new regulations.
6. Anti-avoidance measures for trusts. Specific provisions target the use of trusts for tax avoidance. The Act introduces a 10-year minimum term for grantor-held annuity funds and removes exemptions from generation taxes for certain transfers. Additionally, the new provisions under Section 2901 of the Internal Revenue Code would effectively end the use of new grantor trusts by treating them as part of the estate. IRC Sections 2705(a) and 2705(b) further limit valuation deductions for family-controlled entities and transfers of non-business assets, respectively. These changes will require a complete overhaul of existing trust structures and the exploration of new strategies to maintain the intended benefits for clients.

Strategic Considerations of Estate Planning

Given the breadth of these proposed changes, estate planning attorneys should proactively advise clients on strategies to mitigate potential tax liabilities. Key strategies include:

1. Maximizing Annual Exemption Gifts. Encourage clients to make full use of their annual exemption gifts to effectively reduce taxable wealth;
2. Gift and sales strategies. To shift appreciation from the estate, consider selling assets to grantor trusts with intentional defects or spousal lifetime access trusts;
3. Acceleration of charitable contributions. Clients can benefit from the acceleration of planned charitable contributions through charitable remainder trusts or primary charitable trusts, thereby reducing the overall estate tax burden while fulfilling philanthropic goals; AND
4. Review and restructuring of trusts. Given the new restrictions on GRATs, grantor funds and valuation allowances, existing trust agreements should be carefully reviewed and potentially restructured to fit the latest legal landscape.

Namrita Notani is a senior associate at Spencer Fane LLP