On March 26, 2021 Senator Sanders introduced the “For the 99.5 Percent” Act, “the Act”. If passed in its current form, this Act will drastically change federal estate and gift tax laws. Here are some key points within the proposed Act on transfers of gifts and the Act’s impact on valuations of closely held companies.

What’s inside the “For the 99.5 Percent” Act?

The Act proposes to reduce the U.S. federal gift tax exemption to $1.0 million for gifts made after December 31, 2021.

As of this writing, the federal estate tax and gift tax exemption are unified at $11.7 million. This proposed change will decrease the amount exempt on gifts to $1.0 million. The estate tax limitation, a tax levied on property transferred upon death, is proposed to decline to $3.5 million. While it is unknown what parts of the Act could ultimately pass, it is clear there is motivation to reduce the gift and estate tax exemptions dramatically. It is a great time to check in with your professional team to see if you can take advantage of gift transfers at the current limitation.

What are the tax rate increases?

The Act proposes tax rate changes on transfers of gifts between $3.5 million and $10 million, which would be taxed at 45%. The tax rate increases to 50% on gifts between $10 million and $50 million. A 55% tax rate is proposed on gift transfers between $50 million and $1 billion and a tax rate of 65% is proposed on gifts greater than $1 billion.

Why gift now?

This would mean if the Act passed in its current form, a gift of $11.7 million after December 31, 2021 could result in a tax burden of over $4.5 million versus no tax burden if gifted today. Consider executing future gifting plans now rather than after December 31, 2021. There are creative ways to gift shares and still maintain control in the business. For example, recapitalizing the business with voting and non-voting shares will enable an owner to take advantage of the current exemption and maintain corporate power.

Valuation Discounts

The Act proposes to eliminate valuation discounts if the transferee and family members have control or majority ownership in closely held businesses.

A minority discount is applied to reduce the value of an ownership interest that does not have control in the business or owns less than 51% of the company. The Act’s proposal would ban the application of this discount in family-controlled businesses. Higher valuations result in larger tax burdens.

At KLR, we can help you navigate the fair market value of a closely held business being gifted to take advantage of the current gift tax exemption. We can work with your estate attorney or connect you to estate attorneys to execute an estate plan and take advantage of the current gift and estate tax limitations.

Reach out to us.