Time to Plan for Those With Potential Taxable Estates - Conway Center for Family Business

Time to Plan for Those With Potential Taxable Estates

Keeping You Informed
by Edwin Morrow, J.D., LL. M., Director, Wealth Transfer Planning and Tax Strategies, Key Private Bank

On August 4, 2016, the IRS and the Treasury Department released proposed regulations that would change the law on how interests in businesses are valued for estate and gift tax purposes. It will affect both active businesses as well as more passive ones, such as those holding only liquid investments or real estate. This includes limited liability companies(LLCs) and limited partnerships (LPs,) as well as all corporations (both “S”and “C”).

Under current law, appraisers (and taxpayers, the IRS and courts) must apply downward adjustments in value, such as lack of control and lack of marketability discounts, when owners transfer company interests to their children and other family members. These discounts reduce the amount of estate, gift and generation skipping transfer GST tax exemption an owner uses (or tax an owner has to pay) when making the transfer.

Under the proposed regulations, these kinds of discounts would be sharply curtailed when the transfer is made to family (or trusts for family), and certain restrictions in the corporate agreements may be ignored for valuation purposes. There are additional ramifications for transfers made within three years of death.

There is a public hearing set for December 1, 2016, after which the Treasury Department will likely issue final regulations. Some will likely become effective at the time, and some 30 days or more after. They will not be retroactive to the issuance of the proposed regulations. Thus, new regulations substantially similar to those proposed are likely to become effective sometime early in 2017, perhaps as early as January depending on when the final regulations are issued.

Family business owners now have a strong incentive and a limited window of opportunity to move forward with succession planning that would involve such gifting, while the existing law on full lack of control and other discounts is in effect, and before any other estate and gift tax changes take place.

Three additional factors make the end of 2016 compelling to do more sophisticated estate and gift planning: First, we will be inaugurating a new President and Congress next January. While Mr. Trump proposes to eliminate the estate tax, Mrs. Clinton has proposed reducing the estate tax exemption to $3.5 million and increasing the estate tax rate to 45% from the current 40%.

Second, many high net worth taxpayers made substantial gifts of hard to value assets in 2012, when it was feared the estate tax “cliff” would cause the exemption to revert to only $1 million. Assuming a compliant gift tax return was timely filed in 2013, the statute of limitations for the IRS to contest such gifts in most situations will have expired in 2016, giving taxpayers greater comfort as to the amount of their remaining gift, estate, GST exemption now available.

Lastly, the federal interest rates used for many advanced estate tax planning techniques are at all-time historic lows. The Section 7520 rate for August 2016 is only 1.4% and applicable federal rate for short, mid-term (3-9 years) and long term loans are 0.56%, 1.18% and 1.9% respectively.

Those not wishing to gift large amounts might still exploit the current tax valuation discount standards by selling shares in such entities to an irrevocable grantor trust for a note at the above mentioned rates. Taxpayers with estates significantly greater than $5.45 million ($10.9 million couples) should contact their estate planning attorney and wealth management team to determine what steps might be taken in 2016 to exploit this window of opportunity.


Any opinions, projections or recommendations contained herein are subject to change without notice. Information provided is not intended as individual tax advice and clients should consult with their personal tax advisor for advice. KeyBank does not provide legal advice.

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Proposed Regulations Will Likely Affect Valuations on Gifts of Entities in 2017

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