Current Legislative Proposals Have Broad Implications for Gift and Estate Tax Valuations

By Angela Sadang  |  June 28, 2021

Current Legislative Proposals Have Broad Implications for Gift and Estate Tax Valuations

Two legislative proposals currently on the move in Washington raise concerns for tax advisors and estate planners, and both were among the issues explored at the Heckerling Institute on Estate Planning in May 2021, the largest annual conference on estate and wealth planning in the country. For the second year, Marks Paneth sponsored the event.

The first legislative proposal is the 99.5 Percent Act introduced by Sen. Bernie Sanders, D-VT, on March 25, 2021. The proposed legislation would:

  • Raise marginal estate and gift tax rates, with increases ranging from 45% (for transfers between $3.5 million and $10 million) to 65% (for transfers over $1 billion), depending upon the size of the decedent’s estate;

  • Reduce the basic estate tax exclusion to $3.5 million and the gift tax exclusion to $1 million, not indexed for inflation;

  • Limit valuation discounts for closely held entities that hold non-business assets, if transfers are made to or for the benefit of family members;

  • Limit grantor retained annuity trusts (GRATs) including minimum 10-year term, prohibit any decrease in the annuity during the GRAT term, and set a minimum deemed gift of GRAT remainder interest with a value equal to the greater of 25% of the property it receives or $500,000;

  • Limit benefits of grantor trusts that are outside of one’s taxable estate, including distributions from such grantor trusts would be taxable gifts;

  • Determine that any trust not required to terminate within a 50-year term would be fully subject to GST tax; and

  • Limit the annual gift tax exclusion to $30,000 for gifts in trust and for gifts of interests in pass-through entities.

None of these proposals would be retroactive.

The current version of the Sanders bill includes the words “or by reason of the lack of marketability of the interest,” which are new compared to previous versions of the bill. The objectives of the proposed new section are to attribute control among family members and to presume control from majority ownership, without exception, apparently not even an exception for an active trade or business -- which may be viewed as unrealistic.

President Biden’s Budget Proposal

President Biden’s recent proposal includes significant tax changes, including:

  • Restoring the 39.6% top marginal tax rate on income;

  • Increasing the tax rate on qualified dividends and capital gains to 39.6% for households with more than $1 million of income pose some threats to the lifetime estate tax exemption;

  • A potential repeal of the step-up in basis rules and changes to the lifetime and annual gift tax exclusions; and

  • Bolstering IRS enforcement. 

Several aspects of the president’s proposal are still unclear, particularly as they relate to timing, and presenters discussed planning techniques in the case of a retroactive effective date for these changes. The Biden proposal calls for an increase in capital gains tax rates for certain taxpayers to be retroactive to “the date of announcement,” but it is unclear whether that means the date the budget plan was released, May 28, 2021, or the date the American Families Plan – which contained the original proposal – was released, April 28, 2021. For now, changes to the gift and estate tax law, specifically significant reduction to the $11.7 million current exclusion amount under the Tax Cuts and Jobs Act of 2017 (TCJA), seem to be postponed.

In addition to the Sanders and Biden proposals, recent Tax Court decisions and IRS guidance on valuation discounts are causing tax advisors and estate planners to review clients’ plans. Recent cases involving the Tax Court allowed modest discounts for lack of control and lack of marketability in valuing majority interests in limited liability companies that own real estate, and the applicability of “multi-tiered” discounts at both the holding company and partnership levels. 

Key Takeaways: What This Means for You and Your Business

A key takeaway from the flurry of changes, proposals and Tax Court cases is the importance of obtaining a qualified valuation of your business in light of the ever-evolving trust and estate planning landscape. As businesses and economies recover from COVID-19, the opportune moment to gift at low valuations is now, since the window will get narrower as COVID-19 declines and businesses return to their pre-pandemic performance.

While the timing of the legislative proposals is uncertain, individuals and owners of businesses with appreciated business values and/or asset positions may want to consider hedging against a future effective date of the various proposals for changes in estate and gift tax laws. Gifting and estate planning have become more urgent priorities and should be of prime importance now to maximize your tax exemptions under the current provisions provided under the Tax Cuts and Jobs Act ($11.7 million exemption for taxable estates) before any of the proposals are enacted.

Marks Paneth is here to help with your valuation and tax valuation needs. Please contact us.


About Angela Sadang

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Angela Sadang is a Principal in the Advisory Services group at Marks Paneth LLP. Ms. Sadang specializes in business valuations and the valuation of intangible assets and has over 20 years' experience providing corporate financial consulting services and performing valuations. She serves both publicly traded and closely held companies in a wide range of industries that also involves various asset classes. Ms. Sadang is a Chartered Financial Analyst (CFA) as designated by the CFA Institute and is... READ MORE +


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