Using a family limited partnership or other family business to obtain favorable valuation discounts on gifts or bequests has been a staple of estate tax planning for many years. On August 4, 2016, the U.S. Treasury Department issued long-awaited proposed regulations under Internal Revenue Code Section 2704 that, when finalized, would severely limit the use of valuation discounts for any type of family limited partnership or other family business transfer.
Historically, taxpayers could reduce the value of their taxable estates by placing assets in partnerships, LLCs or closely held corporations and claiming lack of marketability and/or lack of control discounts. These discounts typically reduced the value of the ownership interests by 25% to 45%.
Thus, for example, placing $10 million worth of assets inside a closely-held entity might reduce the value of the estate by $3 million (assuming a 30% valuation discount) and, given the current 40% estate tax rate, reduce the estate tax due to the IRS by $1.2 million.
If finalized in their current form, the Proposed Regulations will likely drastically change the landscape of estate planning with family controlled entities by severely curtailing, if not eliminating, discounted transfer opportunities for transfer tax purposes.
The IRS has scheduled a hearing on the Proposed Regulations for December 1, 2016. The Treasury has stated that the final regulations won’t be effective until at least 30 days after they become final. Taken together, these two statements indicate that the Proposed Regulations could apply to all lifetime and death transfers after December 2016.
Individuals that hold interests in a family limited partnership or other family business should consider taking action by year end if they want to achieve valuation discounts under the current rules.
The attorneys at Nickerson Law Group help families with estate planning, asset protection, estate tax planning, probate and estate administration. They are committed to providing the very best legal counsel so that you and your family are taken care of now and in the future. Attorney Julia Nickerson is Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization.