Gifting an interest in privately held businesses or family limited partnerships is a frequently employed estate planning tool. Transferring private interests in a tax-efficient manner while reducing potential future tax exposure makes sense for many taxpayers. There are, however, potential changes on the horizon to the rules governing such transfers that you and your estate-planning advisor need to be aware of.
A recently published article by James M. Rosa, CPA, PFS, a Principal in the HBK Tax Advisory Group, addresses a $40 billion proposed program from Vice President Kamala Harris regarding housing. The program would primarily be funded via various changes to existing tax law, including raising corporate tax rates, lowering the estate and gift tax exemption, and raising estate tax rates. These proposed changes, layered on top of the expected sunsetting provisions of the Tax Cuts and Jobs Act (“TCJA”), could create confusion over what direction policy is going and what to do next. Below are some key proposed changes, with a focus on valuation, to keep in mind as election season progresses.
Federal Estate and Gift Tax Exemption Historically
Estate taxes have been levied on various-sized estates and at varying rates since being enacted more than a hundred years ago. In recent times, the estate and gift tax exemption has trended upward, with increases occurring under the Bush, Obama, and Trump administrations. Figure 1 details the exemption for single filers over recent years.
The TCJA and Expected Changes
The most recent major change to estate tax laws occurred with the passage of the Tax Cuts and Jobs Act (TCJA) of 2018. Passage effectively doubled the gift, estate, and generation-skipping exemption to $11.2 million from $5.6 million. Adjusted for inflation, the 2024 exemption is $13.61 million. While providing tax relief for larger estates, this is a limited-time offer. The “bonus” estate tax exemption has an expiration date of the end of 2025, at which point the exemption is to be cut in half to between $7 million and $7.5 million. As part of her broad presidential agenda, Vice President Harris has proposed a further reduction of the estate tax exemption to $3.5 million. Figure 2 compares the estimated tax liability for a single taxpayer under three scenarios: current law, post-sunset law, and as outlined under Vice President Harris’ proposal.
Under this scenario, assuming a total net estate (including gifts made over the taxpayer’s lifetime) of $30 million, the taxpayer saw an estate tax liability increase of 56 percent and 133 percent under the TCJA Sunset scenario and the Harris Proposal scenario respectively. The tax impact arises from two areas: the sharp decline in the estate tax exemption and the increase in estate tax rates.
Valuation Discounts
A once-shelved proposal getting renewed consideration is the disallowance of valuation discounts for certain family-owned entities. Ronald Aucutt, formerly of Bessemer Trust, has written a helpful summary for the American College for Trust and Estate Counsel (“ACTEC”) on the proposals and posturing of various presidential administrations regarding valuing family limited partnerships and other closely held entities. Under current law, he explains, family limited partnerships and privately held entities that hold passively held or non-business assets enjoy the same valuation treatment as private operating businesses (if structured properly). Fair market value allows for discounts for lack of marketability and control in gifting and estate valuation scenarios of non-controlling minority interests, regardless of the perceived “passivity” of the underlying assets in the partnership or company. The aforementioned proposal, broadly, would call for a delineation of assets deemed “passive” from private business assets and disallow discounts for passive assets transferred.
The rub? Disallowing discounts would lead to an increase in the value of any gift, eating into the family’s estate and gift tax exemption. Figure 3 provides a simple example of the impact of the proposal.
Where to go from here
As laid out by HBK’s Rosa, there are numerous other changes detailed in the candidate’s proposal worth keeping in mind that will also impact your estate planning, including annual exclusion gift limits, new timing rules, and trust structure restrictions. Taxpayers should take heed to revisit their estate plans, especially if they hold private business assets, to determine the most tax-efficient path forward.
HBK is here to help. Please give one of our tax or valuation professionals a call to discuss your family’s situation and needs.
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