It seems the Grinch does not like Christmas and the IRS does not like societies' producers keeping more of the wealth they create.
[Sigh.]
At the Salvation Army-sponsored "24th Annual Estate Charitable Gift Planning Institute" (broadcast in real-time via satellite to more than 300 locations throughout the U.S. on Tuesday of this week), the presenters spent most of the afternoon on this topic alone.
It seems the proposed IRS regs would significantly restrict the effectiveness of certain tax-saving vehicles, including family-controlled corporations, partnerships and limited liability companies.
So, how might this affect you?
Perhaps you are considering retirement and succession planning for your business.
One option is to transfer the business to children while you are living to minimize estate taxes when you are not.
If this is currently under consideration by you and your professional advisors, then you better put your estate and succession planning on the front burner and take advantage of certain "discounts" that may no longer be available in the very near future.
A recent cincinnati.com post, “Planning can minimize bite on business from estate tax,” explains that the IRS recently released proposed regulations that would close the tax "loopholes" some taxpayers use to minimize gift and estate taxes when transferring interests in their closely held family businesses to relatives.
Translation: If you want to transfer a minority interest in your business to your children, lawful “discounts” regarding the value of those interests can help preserve your lifetime gift exemption.
These discounts usually range between 25 percent and 40 percent and fall within two categories: "minority discounts" and "lack of marketability" discounts.
The reason to apply discounts in situations where a minority interest is transferred is that an ownership position with less than 50% of the voting rights lacks the ability to control.
Would you pay 100-cents on the dollar for a business interest that limits your no say in that business?
There are quite a few things a majority owner can control that a minority member cannot.
For example, a minority member cannot set management compensation, create policies, decide the amount and timing of distributions, and liquidate, dissolve or sell the company.
Using discounts in tax and estate planning can create a big benefit and allow for greater transfer of wealth to family members. In turn, this can keep the business healthy and around to employ folks who then also pay taxes. Curious how that works, yes?
So, if you wanted to transfer a minority interest in your business to your children with a value of $1 million, a discount of 30% would mean that you would only have to reduce your lifetime exemption by $700,000 instead of $1 million.
On the other hand, what if you think your estate will not exceed the $5.45 million or $10.9 million exemption amount?
In that case, you should weigh the desire to transfer the business during your lifetime with the potential to step-up the basis upon your death.
Based on the business structure, your current basis may be significantly less than the current value of the business.
Any gifts made of the business interest would have carryover basis for the recipient.
Ouch!
If you died while owning the business, your children would get a basis generally equal to the fair market value as of the date of death.
In the end, understanding and appreciating this difference can be valuable if you have a low basis and if you do not otherwise anticipate owing estate tax.
A public hearing on the proposed regulations is scheduled for December 1, and the regulations would not be effective until at least 30 days after they are finalized.
Here is the takeaway today: These proposed regs would dramatically restrict the availability of discounts when transferred interests in family businesses are valued for taxes.
What this means to you, your business, your loved ones, your employees and our national economy: If the regulations are approved as proposed, they would apply prospectively. As such, there would be a window of opportunity to take advantage of the current regulations if you are considering the lifetime transfer of interests in your family business.
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.
Reference: cincinnati.com (August 31, 2016) “Planning can minimize bite on business from estate tax”
