By Michael Trainotti
It has been over two weeks since the U.S. Treasury Department issued on August 4, 2016 proposed regulations under Internal Revenue Code Section 2704 that, when finalized, may substantially increase your wealth transfer taxes by blocking a common estate planning strategy. The new regulations would only apply to individuals whose family assets are more than $5,450,00 or married couples above $10,900,000.
Some commentators believe that if they are finalized this would be the most significant change in the estate planning area since 1986. You may have read that planning ahead is key. Since the new regulations will not be finalized until early next year, everyone who would be subject to estate taxes should strongly be thinking about making gifts this year based upon the planning example below that will not be available after the new regulations are finalized.
Historically, taxpayers could reduce the value of their taxable estates by placing assets in partnerships, LLCs or closely held corporations and claiming lack of marketability and/or lack of control discounts. These discounts typically reduced the value of the ownership interests by 25% to 45%.
Thus, for example, placing $10 million worth of assets inside a closely-held entity might reduce the value of the estate by $2.5 million to $4.5 million and, given the current 40% estate tax rate, reduce the estate tax payable by $1 million to $1.8 million.
The above example is also true for making current gifts or sale of assets that you believe will appreciate in value over your life expectancy. Gifting or selling of assets freezes the value of your assets today and shifts the appreciation to other family members. The sale concept is true for the sale of assets to children, especially if there is a sale to a grantor trust where there is no recognition of income or the assets sold has a high basis and no or little income tax is recognized.
I will be preparing an article shortly explaining in more detail some of the planning opportunities that can be key if the new regulations are finalized. I want to point out that there have already been comments that the proposed regulations in current form, if finalized, may violate the congressional legislative history of allowing discounts, ignoring state law provisions governing business entities and general valuation principals occurring daily in the marketplace. If that is the case, legal challenges will be a certainty.
You should contact your advisor(s) regarding whether or not the new proposed regulations may have any impact on your family assets if they become finalized.