Estate and Gift Tax Rules Are About to Change…Again!

American farmerIf you have or think you might eventually have a total net estate worth more than $5,450,000 for an individual or $10,900,000 for a married couple, your taxes are going to increase if you transfer business interests or other assets to family members.

The IRS is at it again and without Congressional approval – this new regulation will impose new challenges to an already over-regulated small business community. This change in the rules would essentially eliminate a useful, albeit complex, estate planning strategy known as “valuation discount planning” which effectively decreases the wealth transfer taxes at death or when “gifting” assets to heirs ahead of death.

Up until now, people were able to transfer fractional interests in closely held family businesses.  Because of the ‘strings attached’ to these transfers – the family member receiving the gift of these fractional interests had no ability to sell that interest or even have a vote on how business was conducted thus allowing professional appraisers to legitimately reduced the overall value those interests by as much as 25% to 45%.

For instance, take a family business without much in the way of cash assets but whose value on paper is $18 million.  Let’s make it a family farm.  The family would like to avoid the estate tax that would be due at the death of the parents because such a hefty tax would result in having to liquidate the assets in order to pay the estate tax – effectively causing the loss of that family farm.  So the parents create a type of LLC often referred to as a Family Limited Liability Partnership (FLLP).  Mom's and Dad's business interests are the managing interests with the interests gifted to the children and grandchildren without any voting rights.  There would also be a prohibition on selling the gifted interests without the approval of the managers.  Mom and Dad also control whether or not any cash distributions are made to these non-voting partners which would not eliminate the need for those partners to pay their pro rata share of the income taxes due.  Clearly, there are not too many third parties that would want these fractional interests which is why, up until now, the IRS has had to agree to the reduction in value.  The goal of this type of planning is obviously to reduce the value of the business sufficiently to avoid the requirement to pay ‘death taxes’ when passing on the small percentage of management partnership shares to their children (and they to their children and so forth and so on). 

Just last month, however, the U.S. Treasury Department announced proposed regulations for Internal Revenue Code Section 2704 that, when finalized, would eliminate this valuation discount planning approach. The Treasury Department won’t finalize the regulations until after its December 1, 2016 hearing at the earliest, so you can still plan and take action if this kind of strategy is important for your family business.

You can still make gifts or sales to your family and take full advantage of the current law. There are many complexities involved in so-called “large” estates which are now under attack by the current administration. Talk to an experienced estate planning attorney such as my firm to structure the valuation discounts/adjustments properly before you move forward.  As always, you can request a consultation online or simply call our office to schedule this complimentary meeting.

Reference: Santa Barbara Independent (September 8, 2016) “New IRS Regulations”


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Update to our Process

The unprecedented coronavirus pandemic has taken our entire country by surprise. We understand how difficult this time is for America’s businesses and families.  However, we believe it is vitally important that we make every effort possible to continue to offer solutions that avoid disrupting our important partnership with you, your family and friends.  As you know, estate planning is not something that should wait for a more convenient time, therefore the opportunity to address your important goals both during and after this crisis should not wait.  To that end, we have added the option of a ‘virtual consultation’ to our office process.  You will now have a choice of either meeting with us in our office or in the comfort of your own home.