I commend you for keeping your ear to the ground. The thundering hoof beats you hear are of another IRS apocalypse.
If 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, then look for your taxes to spike if you transfer business interests or other assets to family members by time-honored means.
For example, family limited partnerships (FLPs) and limit liability companies (LLCs) are traditional business structures to facilitate the intact transfer of family business interests inter-generationally.
As the Santa Barbara Independent reports in “New IRS Regulations,” family business owners commonly transfer their business interest into FLPs or LLCs.
Thereafter, those interests are held in the entity followed by transfer of interests to other family members.
Because these transferred interest are "minority" interests that lack "marketability" (i.e., there are restrictions on their further transfer or sale to third parties), the value of the transferred interests are worth-less than face value. Consequently, their value is "discounted" thereby enabling more value to be transferred.
These discounts can reasonably range from 25% to 45%.
Put another way, placing $10 million worth of assets inside a closely-held LLC or FLP might decrease the value of those assets in the estate anywhere from $2.5 million to $4.5 million. In turn, 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. If these regs move from being proposed to finalized, then this approach would be squelched.
That noted, the Treasury Department will not finalize the regs until after its December 1, 2016 hearing at the earliest.
In the moment you can still make gifts or sales to your family through an FLP or LLC and take full advantage of the current law.
Word to the wise?
You should contact your estate planning attorney and accountant to make hay while the sun still shines.
If the regs are finalized, then likely any planning already on the books will be grandfathered.
Note: This planning can get complex fast and it certainly is not a DIY project.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: Santa Barbara Independent (September 8, 2016) “New IRS Regulations”