One of the most widely used estate planning strategies for freezing the value of assets may be coming under attack from proposed IRS regulations, which may be released as early as September. Many estate planners suggest the use of Family Limited Partnerships (FLPs) and Family Limited Liability Companies (FLLCs) to get family members involved in the family business or in the family's real estate operations. By using discounts for lack of marketability (DLOM) and discounts for lack of control also known as a minority interest discounts (DLOC), estate valuation experts and appraisers have been able to value percentage interests of assets gifted to heirs at favorable values for estate and gift tax purposes (for DLOM anywhere from 20-35% and for DLOC anywhere from 20-30%). These discounts have allowed families to pass on wealth to the next generation at a minimal estate, gift and generation-skipping transfer tax cost. The discounts have been challenged a plethora of times in court with the taxpayers and the IRS at opposite ends.
The taxpayer's position has been that these valuation discounts are appropriate because an outside party may not buy a percentage interest of a piece of real estate or a business for full-price. For example, it may not make sense to pay full value for 23.6% of a commercial real estate building because the ability to sell that piece may be very difficult (lack of marketability). Furthermore, 23.6% of a business may not mean much in the boardroom if another entity or individual owns 51% (lack of control). The Courts have agreed with these findings and qualified appraisers have been used by tax professionals to take into account these discounts when planning family gifting.
The IRS, however, does not like the concept of valuation discounts, arguing that they have been abused and that these discounts are being used by large estates to minimize their estate and gift tax burden. As a result, the IRS may issue new regulations under IRC Section 2704, stopping or severely limiting this estate planning strategy.
There is no guarantee that these regulations will be issued. There is also no guarantee that these regulations won't be issued. As a result, it may be worthwhile to consider some steps to mitigate the risk of this tax law change. We suggest you contact your CPA, Attorney or Tax Advisor for further advice to see whether these new regulations will impact your estate planning, especially if your estate is above the estate tax exemption or applicable exclusion amount, which is $5.43M per person for 2015.
Disclaimer: Please note that every individual tax or economic situation is unique. Before you embark on any specific tax or financial position, it is important to consult your tax, financial adviser and/or attorney. The above isn't and shouldn't be construed as tax, financial, professional, or legal advice.
The IRS, however, does not like the concept of valuation discounts, arguing that they have been abused and that these discounts are being used by large estates to minimize their estate and gift tax burden. As a result, the IRS may issue new regulations under IRC Section 2704, stopping or severely limiting this estate planning strategy.
There is no guarantee that these regulations will be issued. There is also no guarantee that these regulations won't be issued. As a result, it may be worthwhile to consider some steps to mitigate the risk of this tax law change. We suggest you contact your CPA, Attorney or Tax Advisor for further advice to see whether these new regulations will impact your estate planning, especially if your estate is above the estate tax exemption or applicable exclusion amount, which is $5.43M per person for 2015.
Disclaimer: Please note that every individual tax or economic situation is unique. Before you embark on any specific tax or financial position, it is important to consult your tax, financial adviser and/or attorney. The above isn't and shouldn't be construed as tax, financial, professional, or legal advice.
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