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Proposed IRS Changes Call for Planning Action

A recent tax law development could significantly affect estate planning. The lawyers at Holbrook Peterson Smith are available if you would like clarification.

Proposed Treasury Regulations: The Treasury (IRS) has issued Proposed Regulations that could have a dramatic impact on your estate planning by eliminating or reducing valuation discounts in some circumstances. This could be critical for those who own family businesses, corporations, limited partnerships, and LLC’s, and who want to minimize their future estate tax. It may also be important for others who want to protect a family business from the risks of divorce, or who are undertaking planning to shelter assets from lawsuits or malpractice claims. Valuation discounts have for decades helped to leverage transfers of assets out of harm’s way, without triggering gift tax.

Act Now: Time is of the essence. Once the Proposed Regulations are finalized, which could be as early as January 2017, the ability to claim valuation discounts on asset transfers might be reduced or eliminated.

What is a Discount? Here’s a simple illustration of a discount. John has a $20M estate which includes a $10M family business. He transfers 40% of the business to an irrevocable trust for his family. The gross value of the 40% business interest is $4M.  Since a minority 40% trust/shareholder cannot force a sale or redemption of its interest, the non-controlling interest in the business transferred to the trust is worth less than the pro-rata value of the underlying business. Thus, the value of the 40% interest should be reduced to reflect the difficulty of marketing the non-controlling interest.  As a result, the value of the 40% business interest transferred to the trust might be appraised, net of discounts, at say, $2.4M. The discount has reduced the estate by $1.6M from this one simple transaction.

How to Respond: Contact us right away. We can review strategic wealth transfer options that will maximize your benefit from valuation discounts while meeting other planning objectives. Projections completed by your wealth manager could be essential to confirming how much planning should be done and how. Your CPA will have vital input on wealth transfer options, federal and state income tax implications, and more. Your insurance consultant can show you how to use life insurance to backstop some of the planning strategies.

Year-end is often a busy time for trust and estate lawyers and other professionals who advise clients on planning strategies. At Holbrook Peterson Smith, we anticipate the last quarter of 2016 may be especially busy because of the possible changes described in this letter, as well as the potential for tax rate increases (estate, gift, and income) in 2017. If you wish to discuss these or other matters, our recommendation is that you call or make an appointment now.

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