If you have a family business, farm, ranch or have done well, then you have come to the attention of the authorities. This is especially true if you have created a family limited partnership or an LLC to legally leverage accepted accounting, valuation and tax principles.
I didn't think so.
No, the IRS wants to "raise" the taxable value of assets transferred into these legal entities and disallow any "discounting" of their values.
Current speculation is that new rules may come down as early as September.
As Barron’s recently reported in an article titled “IRS Considers New Tax on Wealthy Families,” changes to these common strategies could seriously jeopardize future wealth transfers.
The article is actually a helpful primer for anyone wanting to apprehend in short order how family limited partnerships and LLCs work in theory and in practice.
Shhhhhh. Here is the skinny:
Because minority shares in a private business are illiquid. In other words, they are unable to be easily sold or exchanged for cash without a substantial loss in value.
Basically, these shares are worth less, from a tax perspective, than their stated market value.
Consequently, this is a big help to families who want to lower the "taxable value" of their assets, and in some cases below the $5.43 million gift-tax exemption, for wealth transfer planning purposes.
It also works even if the underlying investments being transferred are themselves liquid. The discount could be as much as 20% to 25%.
The article offers this illustration:
- Your family business is worth $25 million and is entirely owned by the family.
- You decide to pass on a 25% minority holding in the business to your daughter via a family limited partnership or an LLC.
- According to the current IRS rules, you may discount the shares up to 35%, because they are illiquid.
- This works to your benefit, since the IRS discount transforms the $6.25 million in shares into shares valued by the IRS at $4.1 million.
- Viola! At that value the wealth transfer is gift tax free because it is below the $5.43 million gift-tax exemption.
The Treasury Department has put the estate planning community on notice that this may change and has hinted that new rules on family partnerships could be released before the fall.
These rules would restrict definitions and possibly decrease discounts for certain assets.
Given what may be in the works, the original article recommends that you contact an estate planning attorney if you are thinking about forming a family business entity or making changes in the organization of an existing family entity.
With all of these changes in the wind, this may be a great time to get going with these discussions, as any stricter rules that are created could be made effective immediately ... with the fine details sorted out later.
I think we have seen that routine before?
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) and to download free tools to help you organize your estate, visit my estate planning website.
Reference: Barron’s (June 30, 2015) “IRS Considers New Tax on Wealthy Families”