Call us at
Estate Planning

How Will The STEP Act Affect Estate Planning in California?

Senator Chris Van Hollen of Maryland has proposed new legislation that could significantly impact wealth preservation and estate planning strategies used by wealthy families. It is called the Sensible Taxation and Equity Promotion Act.

One of the most significant issues under this law change is that when a wealthy person passes away, the estate of that individual must pay income tax on any previously untaxed gains, just as if that person had sold those assets before their death.

A Brief Overview of President Biden’s Tax Proposals

Congress could potentially make these changes retroactive, which could complicate estate plans for those who pass away before the law’s implementation. There are seven primary components of this law worthy of consideration when you think about your estate plan. Two different laws proposed in March 2021 – the 99.5% Act and the STEP Act – address the issues in this article.

7 Vital Components of the STEP Act That Could Affect Your California Estate Planning

Be prepared for potential changes with the STEP Act and the 99.5% Act that could influence previous estate planning strategies. Although the law has not received full approval and implementation yet, there are seven things to consider.

Reduces the Estate Tax Exemption to $3.5 Million

The current estate tax exemption sits at $11.7 million per person, and the proposal to reduce this is significant since it would drop the amount down to $3.5 million for transfers. Funds beyond that would trigger taxes. It would become effective after the end of 2021.

Reduces the Gift Tax Exemption to $1 Million

The estate tax isn’t the only high exemption issue on the table in these proposals; they would decrease the gift tax exemption for lifetime gifts to $1 million.

Establishment of New Tax Brackets

There will be new tax brackets with rates from as low as 45% for taxable estates between $3.5 million to $10 million to as high as 65% for taxable estates bigger than $1 billion. A 39.6% rate will also apply to taxpayers who have incomes higher than $400,000.

New Limits on GST Trusts

Also referred to as generation-skipping trusts or dynasty trusts, the new laws would put a 50-year limit on these tools in action.

Minority Interest Discount Changes

The new law would impose limits on the discounts received for minority interests when valuing the transfer of specific non-business assets for estate tax and gift tax purposes.

Step Up in Basis Prohibited in Certain Trusts

For those grantor trusts not included in the grantor’s gross estate, the new laws would block using a step-up in basis for assets inside those trusts. Instead, grantor trusts under the 99.5 Percent Act would be included in the grantor’s taxable estate, and any distributions made from that trust to a non-grantor recipient would be subject to the gift tax.

Many estate planning professionals are currently recommending creating and funding these grantor trusts while they are still allowed.

Adds New Chapter to the Code

Chapter 16 will be added to existing regulations with rules associated with the estate, gift, and GST transfer taxes related to grantor trusts. It would formalize how various assets and issues would be treated and impact those waiting to begin their estate planning process until after the new law is adopted.

Plenty of people concerned about the possible impacts of both of these laws are spending the current time setting up meetings with their estate planning lawyer to discuss the viability of current or potential strategies. Many of the tools targeted by the 99.5% Act and the STEP Act are coming under fire in these proposed laws. Even if Congress amends these proposed laws to eliminate some of the impacts, they will likely codify some of them into law. That is why it is even more critical than ever to enlist the support of an estate planning attorney in California to ensure that you’re prepared to adapt as needed.

Ensure Your Estate Plan Is Set Up Properly with the Help of California Probate and Trust, PC, a California Estate Planning Attorney

You might not know what tomorrow brings, but with the support of California Probate and Trust, PC, at least you’re prepared for it. Our estate planning firm helps our clients create an estate plan that preserves their peace of mind and family relationships with the future in mind. In addition, since we watch for legislative changes that could remove or weaken the strategies you have in place, you can count on us to inform you about new laws that directly impact your estate planning strategies and adjust accordingly.

Listen to Estate Planning Attorney R. Dustin MacFarlane discuss The System on his podcast, Legally Speaking:


Are you concerned about the STEP Act and the 99.5 Percent Act and their potential impact on your estate planning goals? Do you have questions about how you can update or revoke previous plans and devise plans for your loved ones at your discretion? Give us a call at California Probate and Trust, PC at 916-674-2066 or complete our online form to schedule an appointment

Request a copy of our free guide, The 7 Reasons Why You Need An Estate Plan by calling our 24-hour hotline at 916-306-0388. Leave us your name, phone number, and mailing address and we’ll send the guide to you ASAP.

Copyright © 2021. California Probate and Trust, PC. All rights reserved.

The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from the individual author or the law firm, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.

California Probate and Trust, PC
9701 Fair Oaks Blvd
Fair Oaks, CA 95628