The Issue of Changes in Estate Tax Valuation Rules Rise Again

Tax revisitedAfter President Trump’s executive order to reduce tax regulatory burdens, the U.S. Treasury Department has pinpointed the valuation rules as laws ready for review in an interim report.

The proposed rules referred to by the mind-numbing title of “Restrictions on Liquidation of an Interest for Estate, Gift and Generation-Skipping Transfer Taxes” under Section 2704 of the IRS Code, would curb valuation discounts and result in increased estate taxes on the deaths of owners of family businesses. Treasury has taken comments on whether the rules should be rescinded or changed. A final report to the President is due by September 17.

Proponents contend that the rules would close a tax loophole for the wealthy. The valuation discounts allow a person to pass more on to heirs free of gift tax and estate tax, by putting a lower value on what they’re giving away. However, many didn’t like the proposed rules that were announced last August.  They discussed their concerns in Treasury hearings in December. They claim that there are legitimate reasons for the use of discounts and that the proposed rules shouldn’t apply to family operating businesses.  However, discounts for family limited partnerships holding securities, by contrast, are said to be riper for abuse and regulation.

The Family Business Coalition says the regulations would “remove important tools business owners use to adjust for lack of control and marketability when valuing minority shares of a small business.”

However, it’s unlikely the rules will ever see the light of day. It might all be moot if Trump gets rid of the estate tax, but you can’t bet on a repeal being permanent. Most folks are proceeding, as usual, doing transactions like sales to defective grantor trusts and GRATs, which are ways to move the wealth forward without a gift tax.

Most are taking valuations based on the way the current law works, and not considering the impact of the proposed regulations (if you take a position on your tax return that’s contrary to proposed rules, you must note it). Therefore, get a qualified appraisal, file a gift tax return and make an “adequate disclosure.”

A recent IRS chief counsel memo said that gift taxes could be assessed retroactively in years where no gift tax returns were filed, but another year was open for assessment because the gifts were not adequately disclosed on the return. But don’t be too aggressive in transferring assets, because the IRS could dispute your valuation on audit. If the IRS is successful, you would owe a gift tax. However, it would be irrelevant, if the estate tax is repealed. Speak to a qualified estate planning attorney before you act.

Reference: Forbes (August 11, 2017) “Hated Estate Tax Valuation Rules On Trump's Hit List”


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