There is an old tax maxim - "pigs live ... and hogs get slaughterer."
It seems the IRS thinks some taxpayers have become hoggish when it comes to wealth transfers leveraging family limited partnerships and family limited liability companies.
And the IRS is fixing to do something about it.
Here is the backstory.
As business entities, family limited partnerships and family limited liability companies have been legal traditional tools for the management and eventual wealth transfer of family businesses, real estate or other illiquid, hard-to-value investments.
Because the management authority has resided fully in the "general partners/managing members" and tight restrictions are placed on transfers of interests any held by limited partners/members, "valuation discounts" have been taken and allowed.
But that is legitimate planning under current tax law.
Here is the problem though.
Someone always seems to push the envelope and ruin everything for the rest of us.
It seems some taxpayers have extended this "valuation discounting" to leverage even the transfer of easy to value marketable securities ... and even cash.
That's abusive, says the IRS.
Consequently, change is in the wind and the hogs are squealing.
The New York Times recently carried the water on this story in an article titled “Navigating Tougher I.R.S. Rules for Family Partnerships.”
While no details on the exact terms of any new regulations (or even any effective dates) have been released, it is unclear whether taxpayers contemplating such advanced estate tax planning should accelerate their discounted transfers before the sword falls.
For its part, the White House estimated in 2012 that closing this loophole could net at least $18 billion in tax revenue over 10 years.
Hoggish assets in family partnerships/LLCs (think marketable securities and cash), still have an objective value that does not justify valuation discounting.
There is a ray of sunlight in this gloom, as the article notes that some tax experts believe entities holding family businesses, real estate or other illiquid, hard-to-value investments - assets that require consolidated management - will yet enjoy see some discounting.
In the end, the article recommends those taxpayers who are (or are) intending to utilize family limited partnerships or family LLCs for some leveraged wealth transfer not to tarry.
Change is in the wind.
Contact an experienced estate planning attorney about how these winds of change may impact your estate planning.
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: The New York Times (August 17, 2015) “Navigating Tougher I.R.S. Rules for Family Partnerships”