Changes are coming to a commonly used estate planning plan tool.
Estate and gift tax rules are about to have a significant change that will impact estate planning for individuals with a total net estate worth more than $5,400,000 or married couples with more than $10,900,000. This concerns the use of valuation discounts created by transferring interests in a family business or other assets.
The Santa Barbara Independent says in “New IRS Regulations” that people in the past usually transferred certain assets into partnerships or limited liability companies (LLC). After the transfer, rather than owning the assets in their own name, the assets were now owned through an interest in a partnership or in a limited liability company (LLC). When the transfers of those entity interests (assets) were made to family members, it meant a reduction of the value of the transferred portion by as much as 25% to 45%. This estate planning strategy—known as “valuation discount planning”—usually decreased wealth transfer taxes at the time of death or when “gifting” assets to heirs ahead of death.
For instance, placing $10 million worth of assets inside a closely-held LLC or partnership might decrease the value of those assets in the estate by $2.5 million to $4.5 million. With the current 40% estate tax rate, this could reduce the estate (or gift) tax by $1 million to $1.8 million.
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.
There is still time to make these transfers, but the window of opportunity is closing fast. Because of the level of complexity in large estates, this is usually not something that can be done overnight and requires careful planning as it may impact other parts of your estate. Meet with an experienced estate planning attorney to make sure that your estate is protected and that any changes are made properly before the proposed regulations become law.
Reference: Santa Barbara Independent (September 8, 2016) “New IRS Regulations”